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61ST Congress ) SENATE -I Dc)CUMENT 

2d Session \ \ 591 



NATIONAL MONETARY COMMISSION 



HISTORY OF THE BANK 
OF ENGLAND 

And its Financial Services to the State 

Second edition, revised 
BY 

EUGEN VON PHILIPPOVICH 

'/ 

'Professor of Political Economy in the University of Vienna 

Translated by 

CHRISTABEL MEREDITH 

WITH AN INTRODUCTION BY 
H. S. FOXWELL 






Washington : Government Printing Office : 1911 



f v 



NATIONAL MONETARY COMMISSION. 



Nblson W. Aldrich, Rhode Island, Chairman. 

Edward B. Vreeland, New York, V ice-Chairman. 
Jui«ius C. Burrows, Michigan. John W. Weeks, Massachusetts. 

Eugene Hale, Maine. Robert W. Bonynge, Colorado. 

Philander C. Knox, Pennsylvania. Sylvester C. Smith, California. 

Theodore E. Burton, Ohio. Lemuel P. Padgett, Tennessee. 

Henry M. Teller, Colorado.. George F. Burgess, Texas. 

Hernando D. Money, Mississippi. Arsene P. Pujo, Louisiana. 

Joseph W. Bailey, Texas. Arthur B. Shelton, Secretary. 

A. Piatt Andrew, Special Assistant to CoTnmission. 



x^ 






TABLE OF CONTENTS 



Page. 

Introduction by H. S. Foxwell 5 

Preface; to first edition 23 

Preface to second edition 27 

Introduction 29 



PART I. 

The Foundation of the Bank of EngIvAnd. 

I. The development of English economic organization dur- 
ing THE SEVENTEENTH CENTURY, WITH SPECIAL REFERENCE 
TO THE LOAN SYSTEM 43 

II. Public credit before the foundation of the bank 55 

III. The foundation of the Bank of England, and its statu- 
tory RE1.AT10N TO THE state 68 



PART n. 



The Relations between the Bank and the Administration of 
THE Public Debt, and of the Public Money during the Eight- 
eenth Century 78 

The evolution of the national debt and of its administration . 

A. The principle of the incorporation of public debt as recognized 

at the foundation of the bank, and its subsequent application : 

1. The principle of incorporation 80 

2 . The attempt to establish a land bank 84 

3. The East India Co 86 

4. The South Sea Co 91 

B . History of the exchequer bills and their importance in the sys- 

tem of public debt 96 

C. The administration of the national debt by the companies: 

1. The distinct characters of the companies iii 

2. The development of the forms of debt 113 

3 . The connection between the companies and the manage- 

ment of the public debt 123 

(a) The East India Co 125 

(b) The South Sea Co 125 

(c) The Bank of England 132 

4. The duties involved in the management of the debt and 

the indemnity paid by the State 137 

II. The administration of public money and the bank's share 

therein 143 

I. The central financial authorities— the treasury and the 

exchequer 145 



National Monetary Commission 

II. Thb administration op pubuc money and thb bank's share 

THEREIN — Continued. Page. 

2. The position of the receipt offices and the exchequer. ... 152 

3. The right of assignment 160 

4. The administration of money by the pay departments. . 164 

5. The transactions between the public office and the bank . 175 



PART m. 

The Legal Development of the Relations between the Bank 
AND THE Administration of the Public Debt and Public 
Money. 

I. The bank and the administration of the public money. 

1. The reforms in the administration of public money be- 

tween 1780 and 1834 183 

2. The union of the public treasury with the bank (1834). . 190 

3. Reforms in organization and administration between 1834 

and 1866 197 

II. The bank and the organization of the public debt 210 

PART IV. 

The Present Position of the Bank as the Financial Servant 

op the State 220 

I. The bank as manager of the public money. 

1. The concentration of the public revenue in the bank 222 

2. The exchequer account 225 

3. The paymaster general and his accounts 231 

4. Provisions for covering the cash deficit 242 

5. Methods of payment 244 

6. The control over money transfers 249 

II. The bank as the office for the management of the public 

debt '. 253 

Conclusion 261 

Appendix I 

The statutory basis of the position of the Bank of England 
in the English economic system 271 

Appendix II 

The settlement of the national land bank 281 

Appendix III 

The present forms of the exchequer bills, treasury bills, 

and exchequer bonds 285 

Appendix IV 

Average amount of the public deposits at the Bank of 

England 288 

Appendix V 
Bank act, 1892 290 



INTRODUCTION 



H. S. FoxwEiyiv. 



The work of Professor Philippovich here translated is a 
recognized economic classic. It owes this position to the 
importance of its subject and the thoroughness and accuracy 
with which the distinguished author has handled it. The 
position of the Bank of England is so exceptional that its 
history must always be of peculiar interest ; and this more 
especially in so far as concerns its relations to public finance. 
For this Bank was, above all others, perhaps, in its origin 
and development, emphatically the servant of the State. 
Arising out of a State loan, it was cradled in a Ways and 
Means Act dealing with the tonnage duties imposed to 
provide interest on the loan; and in early days was nick- 
named the " Tunnage Bank." 

At the outset the Bank of England had no other statutory 
relations to the State; in fact, special provision was made 
to limit its services to those authorized by Parliament. 
Even its banking monopoly was not conferred by the orig- 
inal charter. Starting without a monopoly, it obtained 
its privileged position by its unfailing loyalty to the Gov- 
ernment; just as the Bank of Scotland, which started 
with a monopoly, lost it in 1727 by its suspected affection 
for the interest of the Pretender. Thus the different 
attitude toward the State of the two contemporary banks, 
carrying with it differences of privilege, determined the 
difference in the national systems of banking in England 



National Monetary C ommis s io 



n 



and Scotland, a difference which reached its extreme 
about a century ago. The nineteenth century has seen 
the struggle between these two types of banking end in 
the complete victory of the Scottish type. The issue is 
still a live one in the United States; but in the United 
Kingdom it may now be said that, for good or ill, the large 
branch bank has completely ousted the small local bank. 
In all probability this result would have come about at 
least a century earlier but for the close connection between 
the Bank of England and the State. 

But though the Bank of England was at its origin rather 
an incident of State finance than the foundation of a 
national banking system, its services to the State were 
very narrowly restricted by statute. It is curious to note 
that those exchequer functions which it afterwards under- 
took, and whose gradual assumption it is the principal 
object of this book to trace, are not even referred to in 
the original act and charter. The fact is that the Bank 
of England, like most really English institutions, was case- 
made; it owed its form and functions not to systematic 
planning, but to attempts to meet emergencies as they 
from time to time arose. Thus the "running cash note," 
which afterwards became the most effective banking instru- 
ment of the English bank, was an evasion, even if not 
(as often alleged) a positive infraction of its charter. 
The charter only contemplated an issue of ''sealed bills," 
strictly limited in amount to the capital subscribed. If 
this was so with its banking methods, it was equally the 
case with its relations to the Exchequer. 

The connection of the Bank with the public revenue, as 
Professor Philippovich clearly shows, grew up informally 



The English Banking System 

long before it received legislative recognition. It can not 
be said, however, that the matter was altogether over- 
looked at the foundation of the Bank. As usually happens 
in times of national crisis, when the public mind is deeply 
stirred, the air was full of constructive schemes, and 
almost every conceivable form of public bank had active 
and able advocates. "Banks swarm ever3rwhere," writes 
I/'Hermitage, referring to the numerous projects in 1695. 
Among the various types then proposed there are of special 
interest : The State Bank, owned by the State ; the National 
Branch bank of the type of the present Banque de France; 
and the Bank of London, or City Bank, under the man- 
agement of the Corporation. The first and last of these 
were at the time inadmissible. The credit of neither State 
nor City of London would have commanded general con- 
fidence. It is to be observed that contemporary writers 
always spoke of the Bank of England as resting upon Par- 
liamentary, not State, secinrity; that is, upon an income 
definitely secured by the Parliament upon the yield of par- 
ticular taxes. The Crown might have had more to say in 
regard to a State bank. Moreover, the authorities of a 
State bank might have sacrificed both the national trade 
and the stability of the Bank to exigencies of State. A 
board of merchants representing private proprietors was 
less likely to make this mistake. No doubt a city bank, 
resting like those of Amsterdam and Hamburg on the 
guaranty of the Corporation, might have been trusted to 
promote commercial interests. But the credit of the City 
of London in 1694 was at its lowest ebb. The Chamber 
of London, classed in 1650 with the Bank of Amsterdam as 



National M o n et ar y Commission 

an example of the highest kind of security, had recently 
"fail'd to the Ruine of many thousands of all Ages and 
Ranks." They had been obliged to apply to Parliament 
in 1693 for "means of satisfying the Debts due to the 
Orphans by their Orphans Fund," which was then some 
£600,000 in default. A bill was prepared to provide cer- 
tain local dues for this purpose, and passed into law June, 
1694. The extremity to which the city was reduced may 
be judged from the fact that they paid Speaker Trevor 
a bribe of i ,000 guineas to secure the passing of this bill, 
no less a man than Sir John Houblon, afterwards first 
governor of the Bank of England, being a witness to the 
transaction. The bribe was discovered later, and the 
Speaker expelled from the House. The whole business 
left the Corporation gravely discredited. '^ 

It is not so clear why the third type of bank did not 
receive more consideration. This, whether under State or 
private management, was to be a National, rather than 
a London bank, and to have branches in every important 
town. It was argued in favor of this plan that it would 
give a much more general stimulus to industry and trade; 
that it would tend to prevent their undue concentration 
in the Metropolis (Bristol was greatly concerned on this 
point) ; and that it would furnish invaluable facilities for 
remittance, practically doing away with internal exchange 
rates, then very burdensome. Numerous proposals had 
been made for a bank of this type, most of them anony- 
mous. Those by Daniel Beeckman, by John Gary of Bris- 

o " The poor Orphans sufferings are still fresh in Memory," says the author 
oi Anglice Tutamen, in 1695. 



The English Banking System 

tol, the friend of Locke, and by Daniel De Foe were 
distinctly able and well worked out. Most of the pro- 
jectors laid stress upon the great services such a national 
bank might render to the Exchequer, in the collection 
of the revenue, and by preventing the loss sustained by 
the State through idle balances. Cary was more con- 
cerned for the effect on trade. "Banks, as I humbly 
conceive," he writes, ''ought chiefly to be calculated for 
the use of Trade, and modeled so as may best content the 
Traders." 

But it was otherwise decided. At this time the purely 
financial interest dominated. The trading and coimtry 
interest was to a large extent sacrificed, and administra- 
tive facilities were not considered. It was nearly 150 
years before the country had an adequate system of 
banks, such as might have been founded in 1694, i^ one 
or other of these proposals for national banks had been 
accepted. The administrative economies possible in the 
system of public receipts and payments were postponed 
to the more urgent problem of obtaining money to pay. 
As our author shows, the engrafting of Exchequer business 
on the Bank grew up gradually, almost by accident; 
possibilities of this sort were not taken into account in 
deciding on the form to be given to the Bank. 

It must be admitted that the State did pretty well 
for itself. It derived substantial advantage from the 
Bank, not only in the great emergencies of William's 
reign, but from time to time afterwards, and notably on 
the occasion of Charter renewals; this too, without 
depriving the Bank of its private character, and its 



National Monetary C ommis s to 



n 



responsibility for losses. This, again, is characteristic 
of English methods. The State prefers to exploit pri- 
vate enterprise, rather than to engage in enterprise 
itself. ''Heads I win, tails you lose," is its attitude 
toward private business. Considering how small is 
the chance that the State will ever make any profit on 
its own account, the attitude is not unwise. 

The question of Exchequer methods, however, deserved 
attention; and its importance had already been realized 
by the English people. Whenever a great central bank 
acts as an Exchequer, even if its range is only metro- 
politan, there must be a great economy in the use of 
money. This was carefully pointed out by many writers 
of the time. They could remember the gross abuses of 
the time of Charles II, when the receivers lent balances 
to the goldsmiths long overdue to creditors of the State, 
while the unhappy creditors were forced to go to these very 
goldsmiths to borrow back their own money at usurious 
rates. Down to a much later period, large fortunes 
were made by revenue officials at the expense of the 
State. Occasionally we come across complaints which 
have a more modern ring. The large balances in the 
hands of receivers of the revenue are alleged to have 
caused a scarcity of money in the market. But as a 
rule the receivers banked or lent their money; it was 
their obvious interest to do so. The money was there- 
fore not taken off the market, as is the case when public 
moneys are held by an independent, non-banking, treas- 
ury. Still, if there had been time for fuller consideration, 
the question of the relation of the Bank to the Treasury 
might well have received more thought. The Bank 



zo 



The English Banking System 

was not only willing, but anxious, to undertake Treas- 
ury business.^ If their suggestions had been acceptable 
to Parliament, great advantages of economy and accoimta- 
bility might have been secured from the very foundation 
of the Bank, which, as a matter of fact, were only com- 
pletely realized by an evolution extending over more 
than a century and a half. 

In 1806, when the constitution of the Bank of France 
was imder discussion, this evolution was so far complete 
that the greater proportion of revenue payments were 
made through the Bank of England. It is interesting, 
therefore, to consider the grounds on which Napoleon, 
with the English experience before him, concluded that 
the French Bank should not undertake Treasury business. 
There is a graphic account of the discussions on this 
question between Mollien and the Emperor in MoUien's 
Memoires (especially Vol. I, pp. 292-315, and Vol. II, 
pp. 50, etc.). It is pretty clear that the Emperor allowed 
himself to be persuaded by Mollien against his own con- 
victions. The Emperor wished to see the Bank of France 
undertaking the custody and remittance of the revenues, 
and provided with branch offices throughout the country, 
Mollien 's attitude was critical and ultra-cautious. He 
seems to have feared that the Emperor would have made 
the Bank a mere engine of State finance. Previous banks 
of France had been wrecked by the demands of the State, 

oSee An Essay upon the National Credit of England, I'jod: "It has been 
said that they would give a Million of Money for this Privilege, which has 
never yet been granted, but expressly prohibited by the Parliament, 
(excepting for a small time and in an extraordinary case), though some 
think there are means found out, in a great measiu'e, to evade that pro- 
hibition" (p. 11). The surmise was not far wrong. 



II 



National Monetary Commission 

and the Bank of England itself had only narrowly escaped 
disaster from the same cause more than once in its career. 
lyOgically, of course, there was no necessary connection 
between an Exchequer agency and advances to the State; 
but it would be hard to say that in practice the former 
might not be made a pretext for insisting upon the latter. 
Mollien's account of the conflict of opinion thus arising 
is of almost dramatic interest. He says that the Emperor 
had often conversed with him about the Bank he had 
just established ''sous le litre pompeux de Banque de 
France.'' The Emperor had the highest expectations of 
this Bank. Mollien was as cold on the subject as the 
most severe doctrinaire of the "Guillaumin school" could 
be. The Emperor asks him if he still maintains his spite 
against the Bank. Mollien replies by tendering him a 
carefully prepared paper setting forth his views. Much 
of this deals with points in the charter, to which he raises 
sound objections. The French Bank ought to have paid 
for its monopoly, as the English Bank did. Instead, 
Government was a shareholder in it. If at the start the 
Government did the Bank some service in subscribing 
these 5,000 shares, it would now be doing it a greater 
service if it would free it from the tutelage of such a 
shareholder, who, sooner or later, might become suspect. 
It was because the English Government was scrupulously 
careful to fulfill all the obligations with which private 
debtors had to comply that it was able, without endan- 
gering the Bank, to obtain assistance from it. The 
English Bank made payments and discounts for the 
Government just as for private firms who had opened 
accounts with it. The English Bank also collected cer- 



12 



The English Banking System 

tain portions of the public revenue, and especially those 
pledged for the service of the debt; but it was rather as 
''Grand syndic des creanciers de VEtaV than as Govern- 
ment agent that it made these collections. The State no 
longer had the disposal of these revenues, because they 
had been made over to its creditors; and it was to em- 
phasize the unqualified character of this assignment that 
the duty of collecting directly from the public receivers 
the corresponding amounts was imposed on the Bank. 
Moreover, owing to the fact that the bulk of the English 
debt was in the hands of large holders, who kept accounts 
with the Bank, the payment of interest was a very simple 
matter. It would be otherwise in France, where the 
average holding in 1806 was only 450 francs. 

Mollien goes on to urge that the new French Bank 
can not be usefully compared with the English Bank, 
resting as the latter did upon a century of success. Eng- 
land, he says, is perhaps the only country where the cre- 
ations of credit enjoy so wide a currency that artificial 
money itself does not degenerate into paper money. He 
thought that the real guarantee of the English paper 
w^as neither the shareholder's capital nor the securities 
held by the Bank, but the immense mass of goods stored 
in the country. Napoleon here interposes his own expla- 
nation. He sums up the matter in an admirable phrase, 
worthy of his genius, which exactly hits the mark: ''Peo- 
ple have sense enough to understand that bank notes are 
not paper money. ' ' These half dozen words exactly express 
the position maintained four years later by the Bank of 
England against the Bullion Committee, and form the 
best answer to the innumerable schemes for Government 



13 



National Monetary Commission 

Banks of Issue so constantly put forward. Government 
paper is forced out in payment of the limitless expenses 
of the State. Bank paper, whether bank notes, as in 
those days, or checks to-day, is issued against, and more or 
less limited by, soimd and well-seciu'ed commercial 
credit. Bank paper is normally convertible; State paper 
always tends toward inconvertibility. It was a soimd 
instinct that led England in 1694 ^^^ France in 1800 to 
make their public banks commercial companies instead of 
departments of State. 

To return to the question with which we are here 
mainly concerned, it would appear that the Bank of 
France in 1806, like the English Bank a century before, 
was not unwilling, while retaining its independence, to 
undertake a large part of the Treasury business. It is 
not quite certain how far the governor, Cretet, repre- 
sents the views of the proprietors, because in 1806, for 
the first time, the governor of the Bank was appointed 
by the Emperor, and Cretet therefore presided as Napo- 
leon's nominee. But in the discourse which Cretet 
made to the general assembly of the Bank Direction on 
the 13th of May, 1806, we find him a pronounced advo- 
cate of closer relations with the Treasury. He expresses 
the hope that the Treasury may be willing to concentrate 
in the hands of the Bank revenue services now distributed 
amongst so many intermediaries, estimating the econo- 
mies which would result from such a centralization at 
from 3,000,000 to 5,000,000 francs per annum. He even 
congratulates the Bank on having secured a State lottery 
agency, promising little profit, because it may lead to 
more important connections. This, of course, was pre- 



14 



The English Banking System 

cisely what Mollien feared. So anxious was he to pre- 
vent any advance in this direction that, against the 
advice of the responsible minister, Marbois, we find him 
supporting a proposal for constituting the receivers- 
general into a bank of their own. This bank was to 
handle the public moneys and to make advances to the 
Emperor on the revenue. The proposal seems to have 
been adopted. The circulation of short Treasury paper, 
says Mollien later, is intrusted to the receivers-general. 
For the time, therefore, Mollien had his way. 

It is doubtful whether Napoleon was really convinced 
by Mollien's arguments, but he had a high esteem for him 
and may have thought that there were grounds for caution. 
After listening to Mollien, he sat silent for a few minutes 
and then observed: ''The world is old; we should profit 
by its experience. It teaches us that ancient practice is 
often worth more than new theories." In one way or 
another, Napoleon is brought to say, in the end, that " the 
one thing that seemed clear to him was that there must 
be no alliance between the business of the Treasury and 
that of the Bank." But if he thus adopts Mollien's policy, 
it must of course be for reasons of his own. "Amongst 
many good reasons, one had decided him," he tells Mollien. 
''A simple movement of public moneys often carried with 
it a State secret. He did not wish to increase the number 
of his confidants in matters of this kind." This is a 
reason that would appeal to Napoleon; needless to say, it 
was not influential with Mollien; so far as one can trace, 
he does not even mention it. Mollien was really afraid 
that relations with the Treasury would compromise the 
stability of the Bank. This had often been the case in the 



15 



National Monetary Commission 

past; no one was in a better position than Mollien to 
judge of the probabihty that history might repeat itself 
in the France of his day. Yet Napoleon's ideas were in 
the abstract sound enough, and the later history of the 
Bank of France has justified him. The Bank now has, 
as he desired, branches in every department, in fact in 
every important town; and the Treasury makes large 
use of its admirable organization for the service of the 
revenue. The Bank of France, in fact, keeps the Gov- 
ernment account. 

The classical case of the Second Bank of the United 
States, where a public bank, actually discharging these 
exchequer functions, was in 1834 deprived of them, pre- 
sents a still stronger contrast to the history of the Bank 
of England. It need not be more than mentioned here, as 
the circumstances are so familiar, and have been so ex- 
haustively chronicled. It is possible to insist too much 
on these international parallels and contrasts. No two 
coimtries can be strictly compared in a matter of this com- 
plex character; each case must be carefully considered 
with reference to all the pertinent political and economic 
conditions. Perhaps the analogy is closer between the 
English and French banks ; but even here it would not do 
to attempt to draw general conclusions from the divergent 
policies adopted. The chief use and justification of such 
comparisons is their tendency to stimulate further inquiry. 

As far as the Bank of England is concerned, there is 
little to be added to the very complete account of the his- 
tory of its relations to the State given by Professor Philip- 
povich. That account is brought down to the year 1885. 
The only changes requiring note since that date are those 



16 



The English Banking System 

ffected by the 55 & 56 Victoria, C. 48, usually known as 
.ne Bank Act of 1892. This act is printed in an Appendix 
to this volume. It made a new adjustment of the pay- 
ments due to the Banks of England and Ireland for the * 
management of the debt, in which was now included the 
local loans stock (municipal) and the guaranteed land 
stock (Ireland) . It was a natural time for a reconsidera- 
tion of the question. The great conversion of the national 
debt had been successfully carried through by Mr. (after- 
wards Viscount) Goschen in 1888 and 1889. Both banks 
had given invaluable assistance in the operations. Sir 
E. W. Hamilton, in the official account of the conversion, 
writes that "the labour which the attainment of such 
results imposed on the Banks of England and Ireland was, 
as can readily be imagined, prodigious; and nothing short 
of perfect organization and untiring zeal could have en- 
abled those establishments to grapple with it." To give 
some idea of the magnitude of the necessary operations, 
he mentions a number of interesting particulars. From 
these we learn that the total number of accounts of holdings 
inscribed in the books of the Bank of England was 169,235, 
''which varied in amount from £5,760,000 to the curiously 
small sum of i penny." Three hundred and eighty-seven 
millions odd of Consols and Reduced Threes were converted 
by the Bank of England. The Bank staff had to be largely 
increased, and during some weeks 100 men worked until 
II p. m., and 50 throughout the night. Difficulties of 
identification and verification of agency were specially 
great. "In spite of the immensity and the intricacy of 
the work, no mistakes were committed ; no delays occurred ; 
scarcely a complaint against the banks was preferred." 

68299° — II 2 17 



National Monetary Commission 

The remuneration received by the two banks was 
£101,541 15s. I id. — £98,248 2d. to the Bank of England, 
£3,293 15s. 9d. to the Bank of Ireland; a small part of the 
total expenses of the conversion, estimated at £1,294,142 
1 6s. 7d. This expense, together with the cost of an addi- 
tional quarterly dividend, due to the change from half 
yearly to quarterly payment, was almost wholly defrayed 
out of the surplus revenue for the year 1888-89. The 
work in connection with the redemption of unconverted 
stock was much heavier, in proportion to the amoimt 
handled, than the work of conversion itself. For this the 
Bank of England received £14,01 1 i is. i id. and the Bank 
of Ireland £500. Thus the Bank of England received 
about £112,260 for its services in the double operation. 
The payment was undoubtedly well earned. 

The national debt had thus changed its form, and the 
dividend upon the whole of it was now paid quarterly 
instead of at alternate half-yearly periods on the two por- 
tions, as before. Moreover, the dividend upon the debts 
of the State to each Bank (£11,015,100 and £2,630,769 
4s. 8d., respectively) was also in futiure to be subject to the 
terms of the Conversion Act. These changes made it fit- 
ting to reconsider the pecimiary arrangements between the 
Government and the Bank for the service of the debt. 
These arrangements had been revised by Mr. Gladstone 
in 1 86 1, when the payments to be made by the State were 
reduced by some £50,000 a year. The terms of the exist- 
ing arrangement will be found in the printed act of 1892. 
They are not subject to revision until March, 191 2. They 
involve a further saving to the State of £45,700 a year. 



18 



The English Banking System 

Reference will be noticed in the act of 1892 to a possible 
supplementary charter. This charter was applied for in 
due course, and bears date August 19, 1896. It deals 
exclusively with what may be called the internal affairs of 
the Bank; and for this reason, perhaps, does not appear 
to have been published. It seems to have been granted in 
reply to a petition from the Bank, stating that much in- 
convenience was caused in various respects by certain pro- 
visions of the old charter. The new provisions substituted 
give the Bank greater freedom in matters relating to its 
internal government. The only one which seems to 
concern the public is the first, dealing with the re-election 
of directors. By the first of the acts which conferred the 
bank monopoly, the 8 & 9 Wm. Ill, c. 20 (1697), it was 
enacted (sec. 52) "that in all future elections of directors 
there shall not be chosen above two-thirds of those who 
were directors the preceding year." This provision does 
not seem to give adequate guaranty of due experience or 
continuity of policy in the bank direction. The Bank 
petitioned against the clause March 26, 1697, but it was 
adopted by the House in spite of their protest. There was 
at that time a widespread fear lest the power which their 
position gave to the directors might result in favoritism 
or trade monopoly, and this may have influenced the 
decision of the House. No fiuther statutory change 
appears to have been made until the passing of the act 
(55 ^ 36 Vict.,c. S4', July 18, i8'j2) An act to amend the law 
relating to the election of directors of the Bank of England. 
This provides that " section 52 of the act, 8 & 9, Wm. Ill, c. 
20 (which section relates to elections of directors of the 



TO 



National Monetary Commission 

Bank of England) shall have effect as if seven-eighths had 
been therein mentioned instead of two-thirds." By the 
Bank Act of 1892 it was provided that the act of 1872 
(with other acts scheduled) should be repealed as from 
the date of the supplemental charter, if granted and 
accepted. Accordingly the rule now in force is that laid 
down in the first clause of the supplemental charter. It 
reads, " If a byelaw made by a General Court of the Bank 
of England so provides, such proportion as is fixed by 
that byelaw of the existing directors of the Bank of 
England shall not be eligible for re-election at the then next 
annual election of directors." What the actual effect of 
this curiously worded clause will be it would be idle to 
speculate; it seems to leave the matter wholly at the dis- 
cretion of the Bank court. The question has only an 
indirect relation to the main subject of this work; but as 
the charter is mentioned in the act of 1892, it was 
thought that these brief explanations might be of interest. 

H. S. FoxwELiv. 
January 9, 1911. 



20 



THE BANK OF ENGLAND AND ITS FINANCIAL 
SERVICES TO THE STATE 



BY 



EUGEN VON PHILIPPOVICH 



21 



PREFACE TO THE FIRST EDITION. 

A work which undertook to provide a complete and 
systematic description of the history of the Bank of Eng- 
land and its place in the economic Hfe of the English 
nation would certainly deserve a most favorable reception. 
We should derive from it a deep insight into EngHsh eco- 
nomic history, and should be able also to follow out in one 
preeminently important case the connection between 
banking and all other departments of economic life. The 
Bank of England is the oldest of existing European banks. 
It is the only bank which for nearly two himdred years 
has enjoyed an undisputed reputation and a predominant 
authority within its somewhat restricted field. The evo- 
lution of credit and exchange in the economic organization 
of England are unintelligible apart from the bank and its 
monopohstic position, and therefore the influence exer- 
cised by credit and exchange upon the general economic 
development is part and parcel of the history of the bank. 
No less important in the field of pubHc finance were the 
developing relations between the bank and the State. 
From its estabHshment onward its interests and the inter- 
ests of the State have been closely intertwined. Here 
especially we notice a pecuHarity in the relation between 
the Bank of England and the EngHsh economic organism. 
Legally the bank was free and independent of the Govern- 
ment, but by undertaking pubHc functions in the field of 
exchange it gradually became an organ of State finance. 



23 



National Monetary Commission 

Various continental States have imitated this relationship. 
We see a tendency to generalize the principle of using 
banks to make and receive payments for the States. It is 
certain that the various advantages which this system 
offers as compared with the system of State treasuries 
entitle it to universal application. Hence this side espe- 
cially of the history of the Bank of England is of consider- 
able importance. 

It is for this reason that from amongst the manifold 
phenomena whose investigation is suggested by a study 
of the history of the Bank of England I have singled out 
the evolution of the bank's position as the office for 
administering the moneys and the debts of the State. 
All previous descriptions of the history of this bank — 
and there is hardly any work on banking which does not 
handle some important part at least of its history — pay 
no attention to this factor, despite its indisputable impor- 
tance in the evolution of the bank. 

It is the more deserving of attention in that the German 
Empire has not yet completely elaborated a banking ad- 
ministration of its funds, whilst in Austria the system has 
not been introduced at all. 

It seems, therefore, not undesirable to draw attention 
to a bank which was the first to develop this relationship 
to the State — at least if we confine our view to existing 
European banks. It is true, of course, that the peculiar 
economic conditions of this country make it impossible 
to transfer in their completeness institutions which fit 
the economic life of England, but the advantage of 
studying foreign institutions is not exclusively found in 
imitation. Such study is calculated rather to teach us 



24 



The English Banking System 

how universal phenomena develop particular forms under 
the influence of individually differentiated circumstances, 
and as we consider these connections we become able to 
devise new apphcations of principle. This is the basis of 
the fact that we so often look abroad with good success 
for something which we require at home. 

Dr. Kugen von PhiIvIppovich. 
Vienna, September, 1884. 



25 



PREFACE TO THE SECOND EDITION. 

Since the appearance of the first edition of this book 
the system of administering funds by means of a bank 
has been introduced in Italy and Holland. In the Ger- 
man Empire since 1896 and in France since 1897 an unde- 
niable advance has been achieved by bringing almost all 
the monetary transactions of the State within the exchange 
system of the note-issuing banks, although even to-day 
the Imperial Bank and the Bank of France are used merely 
to transfer, to mobilize public funds, not to administer 
them. The rapid development of the check system in 
the last generation inevitably demands that all pubhc 
business should become a part of the intercourse of the 
money market. In the United States the independent 
Treasury administration has led on several occasions to 
serious disturbances of the business world, and has thus 
directly suggested the reform of the note system and the 
creation of a system of banking which would enable the 
State to leave public funds in the market without risk. 

In the present edition alterations have been made in the 
introduction and the concluding chapter; the relation 
between States and banks of issue have altered greatly 
during the last quarter of a century, the question of 
nationalizing central banks may be regarded as settled. 
The concluding chapter considers the importance for the 
London money market of the fact that the Bank of Eng- 
land acts as cashier for the State. The numerous changes 
in legislation have been thoroughly considered. The 
numerous explanations given are from the chief cashier of 
the Bank of England, Mr. J. G. Nairne, who should be 
mentioned with especial gratitude. 

May, 1911. 

27 



THE BANK OF ENGLAND AND ITS FINANCIAL 
SERVICES TO THE STATE.- 

INTRODUCTION. 

t 

The relation of the State to economic phenomena may be 
investigated from two points of view. If we regard the 
State as the fountain of law, the authority which controls 
the economic intercourse of individuals, we can examine 
the part which it plays in shaping economic phenomena 
and the reactions of this formative influence throughout 
the economic life of the nation. Om- attention will center 
as a rule on problems of maintaining general as opposed to 
particular interests, or of promoting the real as opposed to 
the imagined interests of individuals. Secondly, we may 
regard the State as itself forming an independent economic 
unit and inquire what part it takes or ought to take in the 
economic life of the nation. In this case we shall be con- 
cerned with the economic interests of the State, and our 
part will be to lay down the most effective — i. e., the most 
economical — organization of its administrative activities 
with regard to the matter in hand. Such problems belong 
to the science of administration and their solution is 
found usually in some change of administrative methods. 
They have also a certain significance for the economic life 
of the nation, since that life is so closely connected with 
the economic activities of the State that a change in the 
latter can hardly fail to react upon the former. 

o Translated from the German by Christabel Meredith. 

29 



National Monetary Commission 

We may therefore examine the relation of the State to 
banking from two aspects. We may investigate either 
the influence which the State exercises over the growth 
and development of banking, as representative of the 
public interest, or the extent to which it shares in the 
services of banking as an independent economic unit. We 
shall inquire in the first case into the terms of the law of 
banking, in the second into the advantage which the State 
may secure by making use of the organized system of 
loans and payments established by the banks. The 
opinions which were held about banking at ^ the time of 
its first appearance display a mixture of confused ideas 
about the functions of the State as a protector of com- 
mon interests, and about the real or imaginary advan- 
tages of economic organization which the State might 
gain from the banks. The peculiar importance which 
was ascribed to the banks in both these connections 
caused the State to exercise a far-reaching influence 
over their formation. Indeed it may be said that, in 
central Europe, at any rate, until well into the nine- 
teenth century, the State was regarded as the only 
sufiicient authority for the creation and direction of a 
bank, while at the same time the name bank was used 
to denote institutions of the most widely differing types. 
This confusion in respect to the concept of a bank appears 
in the notion that any establishment may be regarded 
as a bank in which money can be deposited for safe cus- 
tody imder public guaranty, and removed again at any 
time. This notion had, it is true, been modified here and 
there by the end of the eighteenth century, but the 



30 



The English Banking System 

essential idea of a guaranty resting on the good faith of 
the community was still universal. « 

We may distinguish three fundamental causes which 
led to the founding of public institutions authorized to 
act as banks. 

Earliest in time the necessity for regulating the mone- 
tary system and maintaining order therein in the midst 
of a general confusion of coins, induced commimities to 
establish institutions where specie or coin were accepted 
at any time on the basis of a monetary standard, whether 
actually coined or not, at a generally acknowledged value 
and was kept as depositum irregulars. Since these insti- 
tutions also undertook to make payments and allowed 

« Nasse makes it probable that in Venice at least a banking system not 
dependent upon the State existed until the end of the sixteenth century 
("Jahrbuch fiir NationalokonomieundStatistik," 1879, p. 348). Butaccord- 
ing to Endemann throughout Italy, even in the earliest times, to discount 
and deposit banks were obliged to obtain a concession from the govern- 
ment and to give security for this permission to carry on their busi- 
ness. The bankruptcies which occurred in spite of this led men on in the 
fifteenth and sixteenth centuries to the creation of state banks ("Studien in 
der rom. kan. Wirthschaftslehre," 1874, pp. 99, 106 and 426). In Germany 
even the business of the exchange of money, as arising out of the sovereign's 
right of coinage, was a monopoly of the ruler. (Cf. Becher, "Ursachen vom 
Auf- und Abnehmen der Stadte" 3d ed. , 1 688, p. 2 74 ; Poschinger, "Bankwesen 
und Bankpolitik in Preussen," Vol. I, 1878, p. 5 et seq.) Similarly in Eng- 
land (Schanz, "Engl. Handelspolitik," Leipzig, 1881, Vol. I, p. 519). With 
regard to the business of bill broking on the other hand, this can not be 
proved. But all the statements relative to banks made by German authors 
of the seventeenth and eighteenth centuries imply that these institutions 
were guided or at least guaranteed by the Commonwealth. (Cf. Schroder, 
"Furstl. Schatz- und Rentkammer," 5th ed., 1752, p. 234; Becher, op. cit., 
p. 297; Marperger, "Beschreibung d. Banken," 1717, p. 352; Justi, "Staats- 
wirthschaft," Vol. I, 1758 pp. 190, 279; J. K. May, "Einleitungindie Hand- 
lungswissenschaft," Vol. i, 1763, p. 258; Sonnenfels, "Grundsatze der Polizei- 
undFinanzwissenschaft," Vol. Ill, 1776, p. 275; "Geschichtliche Darstellung 
der Banken," Hamburg, 1800, p. 3. Ample proof that this principle was 
carried out in practice in the German States is afforded by the history of 
banking in these States, as detailed by Poschinger in his valuable works. 



31 



National Monetary Commission 

checks to be drawn on them by their customers, they sup- 
phed for the transactions carried on within the circle of 
persons connected with them what the legal medium of 
exchange in general did not supply, a secure and steady 
means of payment. This constitutes the great economic 
significance of these institutions and also explains the fact 
that the community alone was looked upon as entitled to 
create and administer them. Security of economic ex- 
change in a town or throughout a country could not be 
built up on the credit of an individual or of a private com- 
pany. Thus these institutions appeared first in Italy 
under the name of banchi del giro, and at the beginning 
of the seventeenth century in rapid succession at Amster- 
dam, Hamburg, and Niirnberg. Their powerful influence 
upon national econom^ic life is shown by the fact that their 
characteristic functions — the custody of money and the 
discharge of payments — dominated for nearly two hundred 
years the conceptions of what constituted banking. 

The idea of turning to account some portion of the idle 
capital deposited in the girobanks must have followed 
quickly upon their foundation. It is stated that a loan 
bank was combined with the girobank in Hamburg soon 
after the establishment of the latter.'^ 

It must be assumed, however, that the conception of 
banks as purely credit institutions belongs to the more 
developed view of a later period and forms the second 
stage in the development of banking. It did not become 
part of the general thought of Europe until toward the 
end of the seventeenth century. Here again we find the 
State regarded as responsible for meeting the economic 

a "Geschichtl. Darstellung, etc.", p. 78. 



32 



The English Banking System 

needs of the nation by the creation of institutions to sup- 
ply credit, and to be no longer merely deposit or transfer 
banks. Nearly all the projects which arose after the end 
of the seventeenth century, out of a conception — a con- 
ception at times fantastic — of the use and value of banks, 
have this point in common. Loan offices {monies pietatis) , 
institutions for the issue of bills on the security of real 
or personal property, are to be the means of fertiliz- 
ing economic exchanges and enriching the community. 
No one doubted that the creation of such institutions are 
the exclusive privilege of the State. The view that the 
fimction of the State ends with the foimdation and 

does not extend to the management prevailed in England 
alone. 

If we select for examination from among the institu- 
tions actually founded on the basis of projects of this 
kind, those which in virtue of their organization and 
fimctions would still be called banks according to our 
present day ideas, we shall find it at first sight impossible 
to deny to the Governments of the eighteenth century the 
merit of having furnished all possible support to the 
organization of credit by the foundation of banks. No 
single State was without its project for a bank, and there 
are but few in which such projects did not multiply in 
astonishing fashion, until at last a bank was established. 
A closer examination shows us, however, that hardly any 
of these banks owe their foimdation merely to the desire 
to promote the economiic life of the nation. Indeed, it 
appears to me that of all the banks whose history is known 
the Banco di Depositi, established in Leipzig in 1698, was 
alone not provided with other fimctions from the outset, 

68299°— II 3 S3 



National Monetary Commission 

and was the one bank which, according to the law estab- 
lishing it, was intended to make its way by combined 
lending and borrowing transactions — the one bank, that 
is, at whose establishment the advantage of fostering 
credit was the one thing considered. 

In the case of all other banks, and especially of those 
giant institutions which appear in the annals of banking as 
the centers of the credit transactions of entire nations, the 
need of capital and credit in the economic life of the nation 
was not the sole cause and occasion of their establishment ; 
the credit requirements of the State itself were an impor- 
tant additional consideration which often turned the scale. 
By taking in hand the establishment of a bank the 
State seemed able to increase the confidence of its credi- 
tors whom it admitted to be shareholders in the institution, 
to attract home and foreign capital through expectation 
of profit, and in a certain sense to *' create " capital by the 
issue of notes. Banking came to be regarded as a mys- 
tery of State (Schroder), and no Government hesitated 
to adopt that means of obtaining succor in financial 
difficulties. Public credit became so closely associated 
with bank credit that even in the minds of otherwise 
clear-sighted persons the two conceptions could not be 
distinguished.'^ The idea of gain to the general public no 
longer appears in these cases; the leading motive for 
establishing banks is rather the interest of the State. 
This marks the third stage in the early development of 
banking. Attempts were made, it is true, to defend the 
conduct of the banks by arguments drawn from the needs 

ct Thus Sonnenfels in his " Grundsatzen der Polizei-Handlungs- und 
Finanzwissenschaf t " writes: "The constitution of a bank of this kind 
(i. e., a loan bank) cannot be clearly described without defining public 
credit." 

34 



The English Banking System 

of business intercourse, but this did not save the banks 
from being exploited by the State in a most unbusinesslike 
manner; sometimes, indeed, their constitution was from 
the first such as to make them institutions for the raising 
and administration of public loans rather than banks. 
The most striking example of a bank of this kind is the 
Banco del Giro, established in Vienna by the Emperor 
Leopold I in 1703, and reconstituted in 1704. The essen- 
tial functions of this institution were to accept the gov- 
ernment bills issued by the Exchequer, to enter the sums 
due to the creditors to their account in its books, as a 
transfer capital, so that these amounts could be disposed 
of in separate sums by means of transfers, and to discharge 
state debts at fixed intervals by means of the taxes paid 
in, or of such private deposits as might have come in for 
investment. This is probably the clearest instance of the 
creation of a bank with the distinct intention of strength- 
ening public credit. A similar lack of significance for the 
development of the economic life of the nation was dis- 
played by many other banks of the period, which, although 
founded with more judgment, came to a speedy end owing 
to the excessive claims of the State, to which they were 
expected to serve as an inexhaustible source of money. ^ 

o A detailed examination of the history of banking in the eighteenth 
century is not necessary for the purposes of this introduction, where it is 
only intended to point out the share taken by the State at that time in 
the foundation of banks. The examples cited are enough to show what 
far-reaching effects on the erection of banks followed from the idea of 
making them of service to public credit. For a complete treatment of 
the history of banking in Austria, which is especially instructive in this 
connection, see Schwabe-Waisenfreund, "Versuch einer Geschicht der 
osterreichischen Staatscredits und Schuldenwesens," 2 vols., 1866; Bieder- 
mann, "Die Wiener Stadt-Bank," 1858. For Germany, Poschinger's works 
on banking history are the most important source. France affords 
only one example, the sufficiently well-known attempt under Law. The 
position in England will receive detailed consideration in what follows. 

35 



National Monetary Commission 

It is a significant fact that the credit requirements, 
whether of the nation at large or of the State, were met, 
not by accumulation of capital in deposit banks — the few 
experiments in this direction had little success — but by 
issue of notes guaranteed by the State. An inquiry into 
the reason for this would lead us too far. We may, how- 
ever, emphasize the importance in the evolution of bank 
notes of the fact that their use began at a time when the 
prevailing opinion regarded banking as a state preserve. 
The monopoly of note issue required no theoretical basis 
when it was introduced. It arose naturally out of the 
existing relations between the State and banking. 

The now famous suspension of cash payments by the 
Bank of England in the year 1797 and the resultant fluc- 
tuation in the value of its notes gave rise to a theoretical 
discussion and a veritable literature. Not until this had 
happened did the relation of the State to note issues and 
hence to banking in general become the subject-matter 
of a systematic inquiry into fundamental principles. 
Banking rose to increased .importance in the nineteenth 
century, owing to the development of commerce. Orig- 
inally, banks had merely been distinguished, so far as their 
function was concerned, into two classes, transfer {giro) 
and loan banks, and the most varied types of loan institu- 
tions had been grouped together; now this uniform con- 
ception of banking and of the influence of the State over 
banks came to an end. It no longer sufficed to speak of 
banking in general when once the varied conditions of 
credit facilities were recognized. Transfer, deposit, note 
issuing, and mortgage banks were distinguished as sepa- 
rate entities, each possessing its own economic function, 



36 



The English Banking System 

to which its constitution and management must be 
adapted. Besides, a changed conception of the relation 
of the State to economic phenomena in general had grown 
up. State interference with economic relations was re- 
jected as a superfluous and even as axi injurious tutelage. 
The economic advantage of the community seemed to be 
best secured when each individual was permitted to assert 
his own particular interest. The legal privilege of class 
and guild had given place to a law which dismissed dis- 
tinctions of personal position in favor of distinctions of 
actual fact. The law merchant had given birth to com- 
mercial law, while freedom of association and the law of 
companies replaced the charters of individual corporations. 

In banking, this liberating tendency made itself felt first 
in the permission to establish banks subject to the ordinary 
rules of law, and which did not desire to carry on the same 
class of business as the banks which were either managed 
by the State or had received privileges from it and were 
strengthened by its guaranties. The privileges and mo- 
nopoly of note issues, however, continued to exist as a last 
survival of the state banking system of an earlier period. 

They were not, however, based as formerly, on a behef 
in the exclusive banking rights of the State, but on purely 
econmic reasons — on the need for a centralized monetary 
system and for an organization which should afford strong 
support to the money market in times of crisis. 

The estabhshment of banks by the State supplied a 
means for the easier raising of loans. Banks which were 
destined to raise and repay such loans must inspire con- 
fidence in the public creditors, and the economic charac- 
ter of the institutions must oifer a guarantee for the punc- 
tuality of the Government payments. At the present 

37 



National Monetary Commission 

day confidence in the fulfillment of Government obliga- 
tions rests on the constitutional nature of public admin- 
istration, on the publicity of national expenditure, and 
on the control of the latter by a representative Govern- 
ment. A material guarantee is no longer needed. 

The great increase in floating capital has continuously 
narrowed the function of banks in respect to the issue of 
public loans; in the mid-European States their share is 
limited to the sale, either on commission or by a definite 
undertaking, sometimes on a guarantee in case of deficit, 
which, however, under existing conditions of the money 
market, in no case results in permanent possession of 
the stock, but only, in unfavorable circumstances, in a 
temporary ownership; for such functions the deposit 
banks and post-office savings banks, with their close 
connection with investors, are better suited than the 
banks of issue. In rich countries like England and France 
the Government can sell its stock direct to the public, so 
that the banks supply merely technical assistance — the 
acceptance of offers of subscription — and no material 
cooperation. 

Except in the United States, where the note issue is 
based on the possession of consols, the system of public 
debt develops independently of the banks of issue. Dur- 
ing the last generation no important State, except France, 
has raised a permanent loan through its central bank, and 
the loans so raised in the past now form an increasingly 
small part of the total public debt. 

Although the close connection between the State and 
the banks which formerly existed in regard to the note 
issue and the public debt has now ceased, the connection 

38 



The English Banking System 

between the two in the matter of money transfers is con- 
tinually strengthening. This is no matter of an excep- 
tional relation between the Government and the banking 
system, but of an extensive use of the latter for Govern- 
ment payments on a basis similar to that employed for 
private transactions. For the Government this means 
a simplification of the system of payments and accounts; 
for the community the inclusion of the Government 
money transactions in those of the money market. The 
wider the credit transactions and the more sensitive the 
money market, the stronger will be the demand that 
Government business should not be carried on outside 
this organization. 

The employment of banks as agents for public payments 
began in different ways in the several European States, 
and is still, except in England, a fairly recent practice. 
Although the idea was not imknown in earlier times, ^ it is 
only diuring the last century that banks have been defi- 
nitely brought into the administration of public finance 
as the channel through which state payments are made. In 
England, France, Belgium, the Netherlands, Italy, and also 
in the German Empire, public treasuries have been replaced 
by banks, and hence the balance of public money in hand 

o Maxperger, Beschreibung der Banquen, 1717, states that "All pensions, 
prize money, and important civil list payments which a government or 
republic gives to its ministers and civil servants must be taken from the 
treasure chamber or treasury in bank money to the bank," where it 
becomes the property of the individuals entitled to it (p. 116). The sov- 
ereign also ought to have an account at the bank and to hand over his 
revenue to it. This will not injure the financial system, but, just as a great 
merchant in Amsterdam, Hamburg, or Venice looks after his business and 
is supported by the bank, "so will it be with the noble finance ministers, 
who can well make use of the support of such a bank in order to lighten 
their business" (p. 118). 



39 



National Monetary Commission 

has been combined with the capital which the banks have at 
their disposal to meet the demands of the commtmity for 
credit. This leads to a diminution in the actual amount 
of the public balances. They can be kept smaller when 
the public money is managed by a bank than on the 
treasury system. The maximum necessary amount of 
these balances, having regard to the liabilities of the 
State, is dependent at any given time on their geographical 
distribution, on the amount of the receipts which may 
be counted upon, and on the speed with which money 
can be dispatched to the places where payment is to be 
made. Alterations in regard to the geographical distri- 
bution of public liabilities and the transfer* of money 
follow from the technical advantages afforded by the 
banks, and this enables the State to reduce its balances. 
The balances still retained and not required for the dis- 
charge of liabilities are employed by the bank, and a 
considerable sum thus ceases to be useless capital in the 
public treasury. Among the payments due from the 
State which are taken over by the banks, those arising 
out of the public debt are not the least niunerous, and 
this has brought about a further intrusion of the banks 
into the work of financial administration, though here also 
it is the technical side only of debt administration with 
which they are concerned. In particular, the bookkeeping 
connected with loans raised on the system of a payment 
of yearly interest is in the hands of banks in both England 
and Belgium. 

The extent to which banks are used as instruments of 
financial administration, whether of debts or monetary 
transactions, differs widely from one country to another. 
In Germany and France the banks are used less for making 

40 



The English Banking System 

payments than for the geographical distribution of the 
pubHc cash balances. Only in England and in Belgium 
has the business of the public treasury been entirely taken 
over by the banks. And only in England is there any- 
thing that can properly be called a history of this arrange- 
ment. In Belgium it was carried out of deliberate pur- 
pose, it happened all at once. In England it developed. 
It grew up by degrees, in the course of a century, without 
any legislative interference. Owing to the special way in 
which public money was administered the Government 
merely sanctioned what the personal administration of 
its Ministers had already brought to pass. The comple- 
tion of the system in matters of detail was brought about, 
it is true, by legislative action in the nineteenth century, 
but the principle was established by a process of practical 
evolution. 

Hence, even in the eighteenth century, the Bank of 
England stood in a relation to the State entirely different 
from that of the continental banks. Researches into the 
history of this Bank, except as regards the accoimt of its 
foundation, usually begin only with the year 1797. The 
events of this year for the first time attracted attention 
to the Bank in Europe; but in the interval between the 
date of its foundation and this year the Bank's relation to 
the State had developed to an important extent, and this 
not only from a financial standpoint, but by an unsys- 
tematic connection, which grew up purely through the 
free action of the officials concerned with the whole 
business of managing the public money. It was chiefly 
in this way that the Bank secured that overwhelming 
influence which subsequently dominated the history of 
the English bank-note system, which does, it is true, 

41 



National Monetary Commission 

begin in 1797, This influential position is one of the main 
bases of its brilliant history, and especially of the fact 
that, unlike so many of the other banks founded at the 
end of the seventeenth century, it had not a merely 
ephemeral existence. 

In the following chapters we shall describe the develop- 
ment of these relations between the Bank of England and 
the English financial administration, and the form which 
they present to-day. 

In so doing we shall fill up a gap in the history of the 
Bank of England, and further shall demonstrate the great 
advantages which even in our own day may accrue to the 
State on the economic side from the organization of bank- 
ing. We shall not enter into the history of the Bank 
regarded as a factor in the economic growth of the nation. 
Our special concern will be its connection with the eco- 
nomic activities of the State. But in describing the foun- 
dation of the Bank we shall deal briefly with both sig- 
nificant aspects. The Bank arose as a result of the 
requirements both of the State and of the community at 
large. But a somewhat intimate analysis of these causes 
is particularly desirable in view of the fact that incorrect 
estimates are widely held of the importance of the Bank of 
England to the public administration at the time at which 
it was founded. These estimates claim for it a position 
in those early years which it did not secure till more than 
a century later. ^ 

o It must be recognized that Stein was the first to give a partially correct 
estimate of the relations between the Bank of England and the adminis- 
tration of public finance, but his explanation of the origin of these relations 
is incorrect. (Cf. Stein, "Finanzwissenschaft," 4th ed., Vol. I, p. 97, Vol. 
II, p. 484, et seq., and the statements in what follows.) 



42 



PART I. 
THE FOUNDATION OF THE BANK OF ENGLAND. 

I. THK DEVELOPMENT OF ENGLISH ECONOMIC ORGANIZATION 
DURING THE SEVENTEENTH CENTURY WITH SPECIAL REFER- 
ENCE TO THE LOAN SYSTEM. 

We have already pointed out that with few exceptions 
banks made their earHest appearance under the auspices 
of the State. This state intervention was, however, 
merely an external stimulus to the erection of such 
banks — a necessary condition rather than the cause 
thereof. No bank can be established or can prosper 
unless it satisfies a widespread and clearly recognized 
economic need. Such an institution if called into exist- 
ence merely to satisfy the demands of a Government, 
lacks from the outset the conditions necessary for its 
success. The Austrian Banco del Giro was an example 
of this. In England the conditions were different. Here 
a steady growth in economic wealth and vigor and a 
rapidly increasing commerce combined, during the seven- 
teenth century, to arouse an undeniable demand for some 
institution which should afford credit facilities. 

The foundations of that English economic prosperity 
which is so striking to-day were laid in the seventeenth 
century. English history during this period finds its 
significance in the transition from the limited production 
and restricted trade of the Middle Ages to the world com- 
merce of modem times. Moreover, an important change 
in the position of England took place between the begin- 

43 



National Monetary Commission 

ning and end of the century. How great the contrast 
between the year 1609, when an attempt was made for 
the first time ^ to replace, by a copper coinage, the lead 
tokens, which had hitherto been used in minor trans- 
actions,^ and the year 1694, when the first bank note 
circulated in England ! 

In 1607 the royal fleet possessed but 40 ships of 50 or 
more tons burden; in 1695 the number of such vessels 
was over 200.^ Before the Navigation Act English mer- 
chants shipped their goods for the most part in Dutch 
trading vessels/ After this act the trade to and from 
England was in the hands of Englishmen, while the 
tonnage of the English merchant service was doubled in 
twenty years/ The legal rate of interest, which in 1600 
was still 10 per cent, was reduced to 8 per cent in 1624 
and to 6 per cent in 1661.-'' In 1600 the proceeds of the 
land tax were valued at £6,000,000 only; in 1698 Dave- 
nant estimates them at £14,000,000. The English tex- 
tile industry made slow but steady progress and won its 
independence from the Dutch, so that whereas during 
the first half of the century the cloth was sent to Holland 
to be finished and dyed, in 1 699 Davenant calculates that 
woolen goods make up a fifth part of the total exports, 

O' [Sir R. Cotton proposed a coinage of copper coins in 1609. According 
to Lord Liverpool, "Copper coins were first made by royal authority 
in the eleventh year of James I, that is, 1613." "Treatise on the Coins 
of the Realm," 1805, pp. 129-130. These coins were farthings only. 
H. S. Foxwell.] 

& Anderson, " History of Commerce " a. 1609. The prohibition of private 
coins was repeated in 1625 and in 1649. 

c Anderson, a. 1695. 

<^ Jean de Witt. "M6moires" 1709, p. 29. 

« Anderson, a. 1688. 

/Schanz, loc. cit., p. 562. 



44 



The English Banking System 

which total is estimated at £7,000,000. The persistent 
political and religious quarrels which prevailed through- 
out the country during the century did not prevent union 
in economic matters. The economic strength of the Eng- 
lish grew without interruption in spite of the numerous 
changes in the form of government and of the conflict- 
ing principles which dominated the administration. 

A study of English economic history during the seven- 
teenth century reveals two factors as determining the 
economic greatness of the country — the colonial policy 
and the regulations which accompanied it in the sphere 
of economic administration. The great discoveries of the 
sixteenth century were exploited during the seventeenth 
century by the commercial nations in Europe. Holland 
and England stood at the head of the movem.ent. The 
result was a transference to the northern States of the 
economic supremacy in Europe, previously held by the 
Italian Republics. The East, which was the legendary 
home of the European peoples and which formed in addi- 
tion the material basis of their prosperity, was visited 
by newly discovered routes, and yielded its treasures to 
the nations who proved able to use the advantages of 
their maritime position with vigor and with economic 
skill. The efforts to find the shortest route to wealthy 
India led to numerous voyages for the discovery of a 
northwest passage. The result was the colonization of 
North America by the English, who had taken a leading 
part in the enterprise. Although the East India Com- 
pany had made regular voyages to the East Indies since 
1600, the English were slow to settle in America. Vir- 
ginia was founded in 1606; New England in 1620; Mary- 



45 



National Monetary Commission 

land in 1635. The settlements gradually spread toward 
the north and south until, by the middle of the century, 
the English possessions in North America had reached 
their widest extent.^ The colonies were wisely managed 
and their permanent economic value was made the first 
consideration in contrast to the Spanish thirst for gold. 
This was the common opinion as expressed by numerous 
writers, and it was recognized that England administered 
her colonies with a view to slow but lasting profit and 
not to secure sudden riches. ^ 

As a consequence English relations with the colonies 
were based upon a definite economic system of exchange. 
The colonies were to supply England with raw materials 
of all kinds. England was to find a market in her colo- 
nies for her manufactured goods. Commerce and trade 
in colonial products was not the only object; it was also 
desired that these products should be worked up in Eng- 
land. If this were attained England need no longer carry 
on her foreign trade with gold, but could exchange her 
industrial products for other goods and secure a consid- 
erable surplus, turning the balance of trade in her favor. 
Such ideas were frequently enough expressed in writings, 
in speeches, and in Parliament, in reference to the accusa- 
tion brought against the East India Company that it sent 
large sums of gold out of the country every year. No 
logical or consistent system of economic administration 
was attained during this century. England produced no 
Colbert before Robert Walpole. But the regulations for 

«Cf. Roscher, "Colonien, Colonialpolitik und Auswanderung," 1856, 
p. 208. 

^Roscher, loc. cit., p. 243. "Zur Geschichte der englischen Volkswirth- 
schaftslehre," Leipzig, 185 1, chap. 3. 

46 



The English Banking System 

the development and protection of home industry, of ship- 
ping, and of commerce, led ultimately, by a succession of 
efforts carried out piecemeal, to a similar result — an in- 
crease in the production and commercial resources of the 
country. The encouragement given to the settlements of 
French and Dutch emigrants through whom new knowl- 
edge and skill were introduced into many industries, the 
careful protection accorded to new branches of industry, 
the active care of which the textile industries in particular 
were the object, all were effective methods of competition 
with Holland, the country of greatest economic impor- 
tance at this time. How jealously the Dutch woolen 
industry was watched is shown by the proposal made in 
1 65 1 to buy up all the Spanish wool in order to deal a 
severe blow at Holland, where this wool was excellently 
worked up. 

This jealousy of Holland resulted, in the same year, in 
the now famous Navigation Act. The object of this act 
was to secure for England a monopoly of the carrying 
trade from its own ports. The English nation was to be 
forced to develop its merchant service under the protec- 
tion of a draconian prohibition of the foreign carrying 
trade. The Navigation Act was directed against the 
English colonies as well as against foreigners, and this 
especially after it was made more stringent in 1660 and 
in 1663. No goods might be brought into the colonies 
except in an English ship under an English captain. By 
this means a wider field was opened up for English indus- 
tries as well as for English commerce. ''The colonies 
were to remain undeveloped country, for which England 



47 



National Monetary Commission 

served as the industrial and commercial town."" Seldom 
has an economic regulation been so completely justified 
by its results as the Navigation Act, the magna charta 
maritima, as Child called it. 

The gradual and piecemeal fulfilment of desires leads 
however to continually increasing demands for more com- 
plete satisfaction, and complaints of the decay and ruin of 
English commerce continued throughout the century in 
spite of the undeniable and increasing development of 
economic prosperity. And it is always the Dutch whose 
freedom, whose industries, whose commerce, whose power 
as capitalists are held up as models in every branch of 
economic organization. The non-attainment of this ideal, 
while it gives ground for complaint, serves also as a 
stimulus for renewed effort. The jealousy, to which we 
have already alluded, is nowhere more clearly shown than 
in reference to the organization of credit. Mun, Culpep- 
per, Child, Temple, all drew comparisons between Hol- 
land and England, and never tired of pointing out the 
advantages which Holland derived from the supply of 
capital and the organized loan system afforded by its 
Bank. A low rate of interest, such as prevailed in Hol- 
land, was the causa causans of all commercial prosperity 
and of all economic development; until England has 
secured this, she can not hope to compete successfully 
with the Dutch. Child triumphantly records that the 
East India Company was able, in 1681, to borrow £600,000 
at 3 per cent, and can not refrain from adding that this 
would be a most unwelcome piece of news for the Dutch. 

ct Roscher, "Colonien, etc.," p. 254. 



48 



The English Banking System 

The acquisition of large colonial possessions, which 
always means a demand for capital; the resulting oversea 
commerce, the concentration, due to the Navigation Act, 
of the entire carrying trade to and from England and its 
colonies in English hands, must necessarily have given a 
great stimulus during the second half of the century to 
this demand for an organized loan system and for a safe 
and cheap method of borrowing. England's ability, not 
merely to acquire colonies, but to make them prosperous; 
the fact that she was in a position to undertake the trade 
in her own products and those of her colonies in spite of 
the decreased use of foreign, and especially of Dutch ships ;^ 
the steady decline in the rate of interest; all show that 
her control of capital was, even at that time, considerable. 
But the existing institutions were quite inadequate to 
secure a convenient interchange between the possessors 
of capital and the seekers of credit. The increasing num- 
ber of projects and schemes for the erection of a Bank, 
which appeared during the second half of the century, 
bear witness to this. 

The now famous goldsmiths afforded at this time, 
though perhaps not before this time, the most important 
source of credit. Italian merchants, particularly workers 
in gold and silver, had settled in England as early as the 
reign of Richard II, i. e., in the twelfth century. Since 
the times of John and of Henry III, these merchants had 
been employed to collect the customs duties and taxes for 

« It is true, indeed, that during the years immediately following the 
passing of the Navigation Act England had to give way to Holland in the 
trade to certain countries (Russia, Greenland), possibly in order to enjoy 
the more profitable trade with the colonies; but her increased navy was 
soon able to win back every market. (Cf. Anderson, a. 1660.) 

68299° — II 4 49 



National Monetary C ommis s io 



n 



the Crown, and to advance money to the latter. After 
the expulsion of the Jews in 1290 they acquired greater 
importance in this connection." They made use of the 
advanced commercial methods employed in their own 
countfy, for it is said that even in the fifteenth century 
they effected their payments almost entirely by bills of 
exchange; payments in coin were the exception.^ What 
share they took in early times in general monetary trans- 
actions can not be accurately determined. The purchase, 
sale, and exchange of coins had been from ancient times 
a royal prerogative. A special office existed for the pur- 
pose, the cambium regis, called also the Exchange. In 
Henry VIII 's reign this office ceased to be filled and the 
goldsmiths acquired the business of the exchange. 
Whether the proclamation issued in 1627 by Charles I, 
prohibiting the goldsmiths under severe penalties from 
the sale and purchase of money and reestablishing the 
business of the exchange as a royal prerogative, was ever 
enforced it is impossible to determine.^ The statement 
repeatedly made by English writers that the goldsmiths 
were not generally employed as bankers by merchants or 
as money changers until Cromwell's time suggests that it 
was enforced. In any case it is certain that private per- 

a Schanz, "Englische Handelspolitik," Leipzig, 1881, vol. i, p. 551. 

&Schanz, i, p. 557. 

c Schanz, i, p. 522, is of opinion that the office was not filled after 1532. 
In any case the bill business should be distinguished from the business of 
money changing. Both bore the name of " exchange." The bill office was 
permanently abolished in, perhaps, 1532, whilst the offices for exchanging 
money were revived. Anderson states that the cambium regis was recon- 
stituted in 1627 and 1628. The existence of the cambium regis, also 
called Exchange, may account for the confusion made by Marperger 
between the English Exchequer and the Royal Exchange. " Beschreibung 
der Banken," p. 288. 



50 



The English Banking System 

sons deposited their money in the Royal Mint at the 
Tower as late as 1640. But after Charles I, in this year, 
seized the whole amount (£200,000) so deposited, and ap- 
propriated it as a loan for his own use, the scanty confi- 
dence felt in this unpatriotic king seems to have vanished 
entirely.^ It is at any rate stated that from this time 
forward the merchants deposited their money with the 
goldsmiths. Other monetary transactions may easily 
have followed from this. " In the reign of William old 
men were still living who could remember the days when 
there was not a single banking house in the city of Lon- 
don.''^ And in 1672 the business of the bankers, who 
made payments on behalf of merchants, is referred to by 
a contemporary writer as something new and strange. ^ 

But although the banking business may have been still 
a novelty at this time it had evidently grown considerably 
and was of great importance in credit transactions. In 
the first place the goldsmiths received money on deposit, 
probably originally only from merchants. They dis- 
counted the merchants' bills and lent a portion of the 
deposits upon security. In time they were also entrusted 

« William Temple says in one of his writings that the Mint "had then 
the credit of a bank, and for several years had been the treasury of all the 
vast payments transmitted from Spain to Flanders." (See Anderson, a. 
1672.) The Exchequer seems also to have been used as a depository. In 
1666, when George Downing proposed the introduction of an appropriation 
clause which would have given Parliament the control over the receipts 
and issues and would have insured the proper application of the latter, he 
justified his proposal on the grounds that it would excite a feeling of 
security and confidence in the public. He would "make this Exchequer 
the best and the greatest bank in Europe," and "all nations would sooner 
send their money into the Exchequer than into Amsterdam or Genoa or 
Venice." 

& Macaulay, "History of England," 1889, vol. ii, p. 479. 

c Anderson, a. 1672. 



SI 



National Monetary Commission 

with the capital of private persons. They received the 
rents of landowners which were sent to London,, they 
made payments for their customers, and when they found 
that the deposits could be profitably employed they paid 
interest on them. The merchants, however, who deposited 
their money at call received no interest. Hence it appears 
that the payment of interest on deposits was connected 
with notice of withdrawal. °^ The banking business 
developed so rapidly in a short time that even in the sev- 
enth decade we find goldsmiths' notes, payable upon 
demand, circulating as currency. These notes were issued 
up to large amounts. Thus in 1666 one goldsmith had 
notes for £1,200,000 in circulation.^ They were consid- 
ered so safe that, on account of their more convenient 
form, people preferred them to coin. ^ 

There is no doubt that the goldsmiths by forming a 
center for loan transactions greatly benefited the whole 
economic system. But it was in the financial embarrass- 
ments of the State that these credit facilities proved of the 
greatest service. Sometimes the goldsmiths made loans 
direct to the King; sometimes they discounted the bills 
issued by him and by the Government. They employed 
the greater part of their capital in this way. The high 
interest they paid to their creditors was based on the rate 
which they charged to the King. Child accuses them of 
keeping up the rate of interest artificially. Since they 

«■ Anderson, a. 1645, 1665, 1672. 

& Roscher, "ZurGeschichte der englischenVolkswirthschaftslehre/'p. 144 
(from " A Discourse of trade, coyn, and paper credit and of ways and means 
to gain and retain riches, London, 1697. To which is added the argument 
of a learned counsel upon an action of the case brought by the East India 
Company against Mr. Sand, an interloper, 1696"). 

c Law, "Considerations sur le commerce et sur I'argent," 1720, p. 150. 



52 



The English Banking System 

themselves received 8 per cent they paid 6 per cent at a 
time when it should have been possible to borrow at 4 per 
cent.® Experience showed, however, that the rate of 
interest received and paid by the goldsmiths was not high 
enough to protect them and their customers from the 
disaster which resulted from these loan transactions with 
the State, for in 1672 Charles II stopped all payments of 
capital to his creditors and reduced the interest from 8 to 
6 per cent.^ Many of the bankers, who were now pressed 
from all sides with demands for payment, went bankrupt, 
and numerous merchants and private persons connected 
with them suffered severely. No fewer than 10,000 
families were said to have been affected by this misfortune. 
Public credit was destroyed for a long time to come, and in 
addition the confidence which people had felt in the gold- 
smiths was severely shaken.^ 

These events, combined with the increased need for 
credit, must necessarily have revived the demand for 
some institution, independent of the royal caprice, which 
should organize payments and supply loans. 

In 1657 a project for the establishment of a Bank was 
for the first time laid before Parliament by Samuel I^amb. 
And from this time until the foundation of the Bank of 
England various projects were discussed — some in pam- 

o Anderson, a. 1672. 

& [No interest was offered till 1677, when 6 per cent was promised and paid 
until 1683. H. S. F.] 

c Burnet relates an incident in connection with this "shutting up of the 
Exchequer" which shows that the custom of depositing money with the 
goldsmiths was usual even with those who were not merchants. The Earl 
of Shaftesbury, who had advised the King to take the step, had taken "all 
his own money out of the bankers' hands, and warned some of his friends 
to do the like" (History of his Own Time, London, 1724, I, p. 306). 



53 



National Monetary Commission 

phlets, some in memorials to Parliament; as, for instance, 
those of William Potter, Henry Robinson, Hugh Chamber- 
lain, and others. A Bank was to be established which 
should issue notes against the deposit of securities. The 
projects differed more or less according to whether real 
property or movables were to be taken as security and 
whether forced or voluntary circulation was proposed for 
the notes. None of these projects was accepted. But it 
must not be thought that this was owing to a recognition 
of their worthlessness. Many of the pamphlets received 
high praise. The real cause was the fear lest the King 
should raise a Bank to satisfy his financial needs without 
the consent of Parliament. In the struggle with the 
Stuarts the financial weakness of the King and his de- 
pendence on parliamentary grants formed one of the most 
powerful safeguards of the liberties of the people. 

The opinion, widespread on the Continent even at a 
later time, that a Bank was incompatible with a mon- 
archy, « had grown to a veritable conviction in England, 
owing to special circumstances. In England the founda- 
tion of a Bank came to be a political instead of an economic 
question. It was not founded for the benefit of English 
economic organization, which had long needed some such 

a For this opinion, held by nearly all the authors who wrote about Banks 
in the seventeenth and eighteenth centuries, see Poschinger, " Die Banken 
im deutschen Reich, etc.," Vol. I, p. 4, Vol. II, pp. 6, 25 ; " Bankwesen und 
Bankpolitik in Preussen," Vol. I, p. 30; Schroder, "Fiirstliche Schatz- und 
Rentkammer" (ed. 1752), p. 234; Marperger, loc cit., p. 107; "Geschichtliche 
Darstellung der Banken," Hamburg, 1800, p. 3. May alone (" Einleitung in 
die Handlungswissenschaft," 1763, p. 261) regards this fear as needless and 
supports his position by reference to the Bank of England, in doing which 
it must be acknowledged that he overlooked the difference between the 
English and the continental monarchies. 



54 



The English Banking System 

great institution for the supply of credit facilities.® No 
steps were taken to establish a Bank under Charles II or 
under James II, the last two kings of the house of Stuart. 
The complaints of merchants with regard to the long- 
desired Bank obtained no hearing until the "glorious 
Revolution" had taken place, and William III, a strong 
king, but one who enjoyed the confidence of the people, 
had come to the throne; until the liberties of the people 
and the privileges of Parliament had beeji confirmed by 
the Bill of Rights, and the Government of England been 
transformed from an attempt at absolutism to a parlia- 
mentary system. The requirements of public credit gave 
the essential inducement needed to prepare Parliament 
to accept at length one of the many projects, and the 
Bank was destined by the very circumstances of its founda- 
tion to satisfy these requirements. 

II. PUBUC CREDIT BEI^ORE THE FOUNDATION OF THE BANK. 

English writers on finance are generally wont to refer 
the origin of the existing English public debt to the foun- 
dation of the Bank of England. They are so far justified 
in that the debt incurred by the Government to the Bank 
at its foundation was never repaid, and formed a basis to 
which during the eighteenth century enormous additional 
debts were added, the burden whereof still rests on the 
English nation, while no previous debt has any direct 
connection with the existing national debt. English 

« To the great joy of the Dutch, Burnet remarks, " I had heard the Dutch 
often reckon up the great advantages they had from their Banks; and they 
concluded that as long as England continued jealous of the Government 
a Bank could never be settled among us nor gain credit enough to support 
itself, and upon that they judged that the superiority in trade must still 
lie on their side." ("History of his Own Time," Vol. II, p. 124.) 

55 



National Monetary Commission 

writers, however, do not always adopt this point of view. 
They tend more frequently to represent the concept of a 
national debt as first appearing in connection with the 
foundation of the Bank. The term national debt in its 
wider sense includes all forms of government debt, but it 
frequently implies not so much that the creditor's security 
is legally based upon public credit as that the debt is such 
that no provision is made for its redemption, and that 
consequently it forms a permanent burden upon the 
national income.® In this latter sense, the government 
debt to the Bank is regarded as the first embodiment of 
a new principle of borrowing,^ and the history of the 
English national debt is, as a rule, traced back no further. 
This principle did not, however, come into being with the 
Bank of England. It may rather be said to have origi- 
nated with the Banker's Debt of Charles II, for this King, 
as we have already mentioned, ceased payment of the 
capital debt in 1672 and undertook to pay interest only 
thenceforward. But even apart from this fact, we should 
have to preface our history of the Bank's connection with 
the national debt by a description of public credit before 
its foundation. The forms of debt belonging to the earlier 
period continue in the later one and are of the utmost 

« Thus Postlethwayt, "The Universal Dictionary of Trade and Com- 
merce," London, 1766, article "National Debt," writes of "that weak and 
shameful maxim, that it is better for the public creditors to continue 
perpetual annuitants only." 

& "Thus the beginning of paper money and *a Bank ' was the beginning 
of national debt, properly so called. There were before this time arrears 
owing by Government and also some sums taken up on terminable annui- 
ties for lives; but this (the government debt to the Bank) is the first sum 
standing on the debit side of the national account for the redemption of 
which no provision was made or attempted to be made and of which the 
interest only was provided for." (Doubleday, "A Financial History of 
England," London, 1847, p. 73.) 

56 



The English Banking System 

importance with regard to the influence acquired by the 
Bank over pubHc credit. 

Just before the foundation of the Bank a revolution had 
been made in the entire system of pubHc credit owing to 
the essential differences which distinguished the consti- 
tution and administration of William Ill's government 
from that of the Stuart kings. After the accession of 
William III a constitutional system of public finance 
developed in England, whose legal basis was the Decla- 
ration of Rights. Before the "glorious Revolution," on 
the other hand, a continuous struggle had been carried on 
with varying success between King and Parliament with 
respect to the extent of their respective powers. The 
Crown, however, maintained its supremacy. The conduct 
of the entire administration and the determination of the 
expenditure on the various public services were royal 
prerogatives. Parliament had hitherto encroached upon 
this prerogrative only in isolated cases and in dealing with 
weak monarchs. To defray his personal expenditure and 
the cost of the administration directed by him, the King 
had the hereditary revenue and the supplies voted him 
annually by Parliament. Parliament had no control over 
the system of borrowing, with the exception again of 
transitory interferences. Debts were incurred either by 
the King or by one of the separate departments of the 
administration. The King's debts must be reckoned as 
public debts so long as no distinction existed between his 
personal income and the public revenue; but they ceased 
to be part of the public debt so soon as this distinction was 
made. The debts incurred by the public departments had, 



57 



National M on e t ar y Commission 

as a matter of course, a public and equitable character 
which they have always retained. 

lyoans to the Crown were in the seventeenth century 
usually raised on the security of privy seals or letters 
patent. 

Privy seals or letters patent were either vouchers drawn 
up for a particular occasion, or they were distributed in 
great numbers throughout the country, being sent to 
prominent persons who thereupon advanced money to the 
King. They were drawn up in the usual clumsy form 
and embodied the King's pledge to repay the sum stated in 
the rescript at a given date, for which he engaged his 
"word never yet broken to any," and bound himself, his 
heirs, and his successors. A space where the sum lent was 
to be inserted remained blank, and was filled in by the 
lender. On payment of the sum to the collector appointed 
by the King the said collector acknowledged the receipt 
on the rescript and the document thus acquired legal force. 
It was not made out to order, and hence was negotiable. 
After the date on which it fell due it could be presented at 
the Exchequer where it served as a warrant for payment in 
accordance with a clause inscribed on it.^ No interest 
was promised, nor was there any mention of a fund out of 
which the debt could be paid. The raising of loans on 
security of letters patent dates from the thirteenth 
century. ^ Letters patent were also used in recognition of 

oA privy seal of this nature issued by James I on July 31, 1604, is 
printed in the Return on Public Income and Expenditure, P. P. 1869, 
366 II, p. 509. 

& Return on National Debt, P. P. 1858, No. 443, p. 87, quotes from an 
issue roll of the Exchequer of the year 20 Edw. I (1292). 



cS 



The English Banking System 

an already existing debt. Thus in 1672 Charles II by 
letters patent acknowledged the interest owed by him to 
the deceived bankers." 

The debts of the public departments were incurred 
either through anticipation of the receipts of the revenue 
or through arrears of payment. A loan was raised by 
assignments on anticipated receipts from the taxes, or 
payment was actually made with such an assignment, or 
arrears of payment were recognized, for which there was 
legal liablity in case the claim was not satisfied. 

Loans in anticipation of revenue can be traced far back 
in English history. Madox mentions them as used in the 
time of Henry III (1242) in the same form as that custom- 
ary in the seventeenth century. Pieces of wood called 
tallies were issued, which, to distinguish them from the 
tallies of sol used as receipts in the course of the adminis- 
tration of public money by the Exchequer, were called tallies 
of pro. The tallies of pro were at first used only in the proc- 
ess of payment. They were instruments of payment which 
were issued to the sheriffs and receivers of the Exchequer 
as a charge on them to pay the sum inscribed thereon out 
of the revenue in their hands. When the accounts of the 
revenue were presented to the Exchequer the sums repre- 
sented by these tallies of pro were assigned to the receivers 
in question. The name was derived from the word ** pro " 
cut on the tally, together with the name of the person for 

o- Since letters patent under the Royal Sign Manual contained the sov- 
ereign's pledge of payment, an action could be brought if payment were not 
forthcoming. The celebrated Bankers Case before the court of exchequer 
under William III (Howell, State Trials, London, 1812, vol. 14) was based on 
such an action. Judgment was obtained against the Crown. Lord Somers, 
the chancellor, set aside the decision, which was, however, finally upheld 
by the House of Lords on appeal. 

59 



National Monetary Commission 

whom it was issued and to whom it was to be paid. These 
taUies of pro were also used in the anticipation of taxes. 
Anyone who advanced money on the security of the taxes 
to be anticipated was given a tally on which was notched 
his name, the amount advanced, i. e., the sum to be 
repaid, and the head of the revenue on which the payment 
was charged. From this use they received the additional 
name of tallies of anticipation. They were also called 
tallies of assignment, since in times when money was very 
scarce they were used instead of actual payments." 

Until the reign of Charles II these tallies of anticipation 
do not appear to have borne interest, and they were not 
negotiable. By 12 Charles II, c. 9 (1660), they secured 
the first advantage, and 17 Charles II, c. i., made them 
negotiable instruments. 

By this latter statute an order of repayment, signed by 
the lord treasurer, was assigned to all who should advance 
money to the King, in addition to the tally acknowledging 
the payment of the loan. This order of repayment bore 
the same date as the tally, and contained, besides the 
order to repay the capital, an order to pay interest (6 per 
cent) and 6 per cent additional interest in case the payment 
were delayed. A register was kept of all loans made on 
such guaranties. The claims arising out of the tallies 
and the orders of repayment could be transferred by 
indorsement on the order. All such transfers must be 
notified to the Exchequer for entry in the register. 

a Madox, "The History of the Exchequer," London, 1769 (2d ed.)- This 
description is taken from Return on National Debt, 1858, 443, p. 88, and 
Return on Public Income and Expenditure, 1869, 336, I, p. 340, where 
also is given a drawing of a tally and its inscription. 



60 



The English Banking System 

The tallies of anticipation were not always issued against 
specified heads of revenue. As the financial administra- 
tion fell more and more into the hands of Parliament, the 
methods of borrowing became freer. In time acts of 
Parliament made it legal for the Treasury to issue tallies 
as soon as the taxes were imposed, in order to obtain the 
money more rapidly. It was sometimes arranged that 
these tallies should be repaid out of the supplies voted 
and that the latter should be ear-marked for the purpose ; 
sometimes the act only gave a general authorization for 
the anticipation. The latter form of loan on security of 
the public credit in general was continued into a later 
period.^ 

As soon as the tallies fell due they were presented for 
payment by the last holder, either at the Exchequer or 
to the revenue department on whose funds they were 
charged. If the holder did not present himself it appears 
that a public announcement was made that payment was 
due.^ 

With regard to arrears of payment the Government 
either left them until they could be paid out of the receipts 
of the revenue and the parliamentary grants, or they were 
met by tallies of anticipation in lieu of payment, or 
finally, a formal acknowledgment of debt might take 
the place of the delayed payment. In the latter case 
the one debt was replaced by another of like amount but 

a Thus in 9 Will. IV, c. 44, 11 Will. Ill, c. 2, 12 and 13 Will. Ill, c. 11, 
I Anne, c. 12. 

b Cf. a notice in the London Gazette, October 8-12, 1696, that three tallies 
of pro in the names of George Toilet, Richard Uphill, and Sir Stephen 
Evance, levied on the Hereditary and Temporary excise "are ready to be 
paid ' ' if presented to the cashier general at the Excise Office. 



61 



National Monetary Commission 

possessing certain advantages for the creditor. Such 
forms of debt developed in connection with the navy, the 
army, and the ordnance departments and were the origin 
of the navy bills and of the debentures. Unfortunately 
the nature of these bills in early times cannot be exactly 
determined. The following account may, however, be 
regarded as substantially accurate: 

The navy bills were issued by the commissioners of 
the navy office in payment for stores and provisions pur- 
chased. They were vouchers resembling bills of ex- 
change, which fell due after a certain interval, and bore 
interest, which interest was added to the amount of the 
bill when it was made out. They are first mentioned in 
1693 when £1,430,439 was outstanding in such bills. 
The victualing and transport bills were similar forms of 
recognition of delayed payments. They, too, were ne- 
gotiable and were issued by the victualing ofiice, a 
department of the Admiralty, and by the transport ofiice. ** 

Debentures are referred to in various parliamentary 
papers as being of very ancient origin.^ But so many 
kinds of transactions are referred to under this name that 
it is difficult to determine their exact nature as a method 
of borrowing. In the first place we must distinguish the 

« William Fairman, "An Account of the Public Funds," London, 1824, 
p. 151, gives a history of the navy and victualing bills from 1749 onward. 
It appears however from the parliamentary reports of an earlier date, in 
particular, the report of the Commissioners of Public Accounts, 171 1, and 
from a pamphlet ascribed to Robert Walpole (The Debt of the Nation, 
stated and considered in four papers, I. "A letter to a friend concerning 
the Public Debt, particularly that of the Navy." 1712, in Lord Somer's 
" Tracts, " Vol. XIII) that the character of the bills had not altered since 
the beginning of the eighteenth century, 

& Return on National Debt, 1858, 443, p. 87, Report on Exchequer, 
1831, 313, p. 94 (on p. 119 a reprint of a debenture is given). 



62 



The English Banking System 

assignments of the auditors of the receipt, officials of the 
Exchequer, which assignments are referred to as deben- 
tures, and to which I shall return later. Neither are we 
here concerned with the certificates which the customs- 
house collectors gave to exporters of goods who were 
entitled to a drawback, and by reason of which certificates 
the drawback was duly paid at the proper office.® Deben- 
tures in different forms appear also as floating debt. Thus 
31 Chas. II, c. I, provides that the commissioners for 
disbanding the forces should discharge the payments still 
outstanding by means of certificates or debentures. 
These are to be issued under their hands and seals and 
addressed to the lords commissioners of the Treasury, who 
shall thereupon, without other warrant of the King, issue 
an order for the payment of the sum so certified together 
with interest at 8 per cent from the date of the order. 
These orders for payment were assignable by indorsement. 
In many cases, however, the Treasury was empowered to 
issue debentures, which are described as vouchers signed 
by at least three of the lords commissioners, and bearing 
interest from the day of issue; they were classified and 
paid on notice being given in the London Gazette. Finally 
another form of debenture was customary in the ordnance 
office; this was taken up in the ordinary process of pay- 
ment and two sorts were distinguished: ready money 
debentures and debentures in course.^ 

The former were merely orders from the public depart- 
ment on the pay office, which orders were cashed as soon 
as presented, the latter were classified, and whenever the 

« Postlethwayt, loc. cit. Art. "Debentures." 

^ Similar forms for debentures are authorized by later acts, e. g., i Anne, 
c. 107, s. XXX ei seq. 

63 



National Monetary Commission 

supply of cash allowed it — regularly every three months 
toward the end of the eighteenth century — were called 
in for payment, when the person entitled to the money 
was allowed interest at an agreed rate.^ 

The arrears in the army and ordnance departments in 
both the seventeenth and eighteenth centuries always 
appear in the public accounts under the titles of army 
and ordnance debentures. Whether the form of ordnance 
debenture used at the end of the eighteenth century is 
the same as that employed during the earlier period it 
is impossible to determine. It is doubtful, even con- 
sidering the great stability of all forms of commercial 
currency in England; but the debentures of all dates 
must have had one common characteristic since they all 
embodied the recognition of a deferred payment on the 
part of the ordnance office. In this respect they resemble 
the army debentures, while the Treasury debentures 
must be regarded as a unique form of floating debt. The 
latter are only mentioned here in order to demonstrate 
further the ambiguity of the word debenture; so far as 
our researches have extended no instance of their use in the 
seventeenth century has yet been authenticated.^ It has 
already been pointed out in another connection how 
important a share the bankers took in the system of public 
loans. By their means the above-mentioned bills were 
put into circulation. Under Charles II the employment 

(^ 1 2th Report of the Commissioners on Public Accounts, 1780, and 21^ 
Report of the Com.missioners on Public Accounts, 1797. 

& These debentures issued by the Treasury, also called loan debentures, 
were first issued in 1731, under the authority of 5 George II, c. 2. They 
were rare in England, more frequent in Ireland, and continued to be 
used even in the nineteenth century. Fairman, loc. cit., p. 147; Return 
Public Income, II, p. 542. 

64 



The English Banking System 

of bankers as intermediaries took the place of the direct 
transactions with the pubHc which had been usual earlier. 
They were soon so useful to the King's Ministers that the 
latter declared "that they were so necessary to the King's 
affairs that they knew not how to have conducted them 
without that assistance." ^ As soon as the subsidies 
were voted by Parliament, the King summoned the 
bankers and consulted with them in person concerning 
the sums which they were willing to advance on the 
security of the revenue. If the King came to an agree- 
ment with them, and if the interest and the date of repay- 
ment were agreed upon, then, upon payment of the sum, 
they received either public or royal securities, i. e., either 
tallies with orders of repayment, or privy seals. The 
interest which the King had to pay was usually 2 to 4 
per cent higher than that paid by the bankers themselves. 
So long as the Treasury punctually fulfilled its obligations 
the bankers were always ready to make advances, and 
Clarendon considers that the loans were perhaps obtained 
too easily, so that there was too strong a temptation to 
borrow rather than to save. After 1672 the bankers 
drew back, rendered mistrustful owing to the reckless 
violation of their rights by Charles II, and the King and 
his Ministers were obliged once more to trust to such 
confidence as they might enjoy with the general public, 
and especially with the rich London citizens. 

The military enterprises of William III soon required 
more supplies than the Government could secure from the 
proceeds of the revenue and taxes and by using the uncer- 

a Clarendon, "Life," Vol. II, p. 218. 
68299°— II 5 65 



National Monetary Commission 

tain and decayed credit of its bills. Attention was turned 
to new methods of borrowing, which promised great results, 
thanks to favorable circumstances and to the fact that 
henceforth the consent of Parliament was necessary before 
a loan could be raised, and that consequently the security 
of the creditors was increased. 

In 1689 a loan in the form of a tontine was, for the first 
time, raised in France, and it is probable that this form 
found its way thence to England, for in 1693 a project for 
a similar loan was adopted in this country. A million 
was to be subscribed for the purchase of shares at £100. 
Each subscriber was to receive £10 a year for seven years, 
and afterwards 7 per cent for life. The survivors were to 
succeed to the rights of any subscribers who died until 
the total number of claimants was reduced to seven. 
About £900,000 were subscribed on these terms, the 
remainder was borrowed on promise of 1 4 per cent interest 
for a life." 

In the following year recourse to a loan was again neces- 
sary, and once more an annuity was the form chosen; but 
this time in connection with a lottery.^ There was to be 
the usual purchase of an annuity for sixteen years, but as 
an incentive the chance was thrown in of winning an ex- 
ceptional sum by a lottery. The annuity was not high. 
It amounted to 10 per cent, or £1 on every £10, at which 
price the tickets were issued. Out of the 100,000 tickets 
2,500 were raffled for; these were fortunate tickets 
and entitled their owners to extra annuities, the high- 

«The rules for the tontine loan were determined by 4 Will. & Mary, c. 3. 
Those for the annuity connected with the remainder by 5 Will. & Mary, c. 5 
& 5 Will. & Mary, c. 7= 



66 



The English Banking System 

est of which amounted to £i,ooo, while the lowest was 
only £io.^ 

There was an important difference between the tallies, 
bills, and debentures, and the form of loan last mentioned, 
and the loans of 1693 and 1694 mark at any rate an ad- 
vance in the technique of borrowing. The superiority of 
these loans lay above all in the fact that Parliament had 
undertaken the organization of the system, had voted 
new taxes to cover the liabilities arising out of the loans, 
and had determined the conditions upon which they were 
to be raised. From this time forward parliamentary con- 
trol over the raising of loans remained unrestricted. The 
privy seals now became valueless as far as the public debt 
was concerned, since loans could not be raised without the 
consent of Parliament. The bills and debentures, how- 
ever, remained in use, since they merely contained an 
acknowledgement of a debt incurred in the course of ad- 
ministration. Parliament could exercise no direct control 
over debts of this kind, nor was the expenditure of the 
different public departments controlled in detail or con- 
tinuously. It was consequently possible to meet expenses 
for the public services by loans raised by the administra- 
tive departments, and the more so since the deficit was 
not necessarily due to expenditure beyond that estimated 
in the receipts. It was otherwise with the tallies. These 
were orders for payment out of future revenue and con- 

c- The technical arrangements for the lottery were as follows : One hundred 
thousand tickets, numbered in the order of their issue, were placed in one 
box, and 100,000, of which half were blank and half inscribed with the 
amount of the prize, were placed in another box; the tickets were drawn 
from both boxes simultaneously, so that those numbers which were drawn 
at the same time as a fortunate ticket entitled the holder of the annuity 
certificate bearing the same number to the prize. 

67 



National Monetary Commission 

stituted an express claim on the latter even before it had 
been voted by Parliament. Their issue was likewise regu- 
larly controlled by Parliament. Permission was given, 
when the act granting the taxes was passed, to issue tallies 
for the amount voted, so that in view of its pressing neces- 
sities the treasury might obtain the money at once. The 
consequence often was that the taxes, when ultimately 
paid, did not amount to the sum granted and hence did 
not cover the tallies issued. The Treasury could only issue 
tallies on its own authority in the case of taxes voted for 
the lifetime of the King, in which case the receipts were 
entirely at the disposal of the Crown, or in other words, of 
the Treasury as empowered by the Crown. The Govern- 
ment suffered from one great disadvantage with regard 
to all these forms of floating debt, i. e., it was powerless 
to determine the conditions of the loan. Driven to issue 
the loan in times of need, it must accept the terms offered 
by the public. In this unfavorable position it made mat- 
ters worse by unpunctuality in repayment and by con- 
tinual fresh issues, so that it is easy to understand that its 
bills could often only be disposed of at great loss. This 
had happened in the first instance with regard to the ton- 
tine and lottery loans, and later on, at the foundation of the 
Bank of England. 

III. THE FOUNDATION OF THE BANK OF ENGI.AND AND ITS 
STATUTORY RElvATlON TO THE STATE. 

The projects for the foundation of a Bank in England 
which were brought forward during the Commonwealth 
and the reigns of the two last Stuart kings, while they 
look upon state intervention as essential, contain no sug- 



68 



The English Banking System 

gestion of any financial connection with the Government. 
The projects during the reign of Wilham III, on the con- 
trary, are remarkable in that they all contain the pro- 
posal that the capital stock of the Bank should constitute 
a loan to the State. Thus William Paterson in 1692, in 
conjunction with several merchants, offered to advance a 
million to the Government in return for a yearly payment 
of £65,000. The stock certificates of the debt were to 
have forced currency or to be legal tender; in which case 
Paterson and his friends undertook to keep £200,000 in 
hand for the regular exchange of such bills. This sum 
was, however, to bear interest separately at 5 per cent.^ 
In 1694 Paterson made a second proposal. Two milUons 
were to be advanced to the Government at 7 per cent. 
The subscribers were to have the privileges of a corpora- 
tion. They were to provide a fund of £200,000 to keep 
in circulation bills to the amount of one million, which 
bills were to bear interest at 8 per cent. This proposal 
also was not accepted, but a third project brought for- 
ward by Paterson in the same year was finally agreed to 
by the Government and by Parliament, and received legal 
sanction in 5 and 6 Will. & Mary, c. 20. 

This act established the Bank of England. It fore- 
shadowed none of those important consequences which 
were afterwards associated with the Bank. There is no 
reference to any transference to the Bank of the manage- 
ment of the public debt, nor of the administration of the 
public money. Even the note circulation of the Bank 
was only partially regulated. ''The scheme * * * 

« H, Macleod, "The Theory and Practice of Banking," 3d ed., 1875, I, 
p. 377. 



69 



National M on et ar y Commission 

was smuggled under the long tail of an act of Parliament 
for raising moneys generally " (Doubleday) ; and there 
is nothing in the title to suggest that the act provides for 
the foundation of an institution for the supply of credit 
facilities of great importance in public finance." 

After provision has been made for the levying of vari- 
ous duties it is enacted that the sum of £100,000 shall be 
set aside yearly from the proceeds of these duties for the 
payment of any persons who shall advance £1,200,000 to 
the Government before August i, 1694. Their Majesties 
are empowered to constitute the subscribers of this sum 
into a corporation under the title of "The Governor and 
Company of the Bank of England," and to grant them all 
privileges as such, in particular the right to own property 
of all kinds, including land. The shares of the subscribers 
(stocks) are transferable in such manner as their Majes- 
ties may think fit to determine. No one may subscribe 
more than £20,000, a quarter to be paid at once and the 
remainder before January i, 1695. Should the final pay- 
ment not be made the first becomes the property of the 
Crown, 

The corporation may deal in bills of exchange, may 
buy and sell gold and silver bullion, and may lend money 
on security of goods and merchandise with the right of 
selling such security if repayment be not made within 
three months after the time agreed upon. It may sell 
other goods only if they are the produce of land belonging 

«■ See Appendix I ; cf . also Leroy Beaulieu, who says of the foundation of 
the Bank: "Aussi ce n'est pas a cause d'une ndcessite k.conoxmqv\e. sentie 
et comprise, c'est a titre d'exp^dient utile a la couronne, que fut cr66 le 
plus grand et le plus solide etablissement de credit du monde" ("Traite de 
la science de finances," Paris, 1877, vol. II, p. 504). 



70 



The English Banking System 

to it. Trade in any kind of goods or merchandise, not 
arising out of the above transactions, is forbidden under 
penalty of a fine of three times the value of the goods. 
Money may only be borrowed up to the amount advanced 
to the Government ; for any sum. in excess of this the per- 
sonal property of the subscribers is liable. All notes and 
bills of credit issued by the corporation can be assigned 
by one person to any other who shall voliuitarily accept 
the same by means of an indorsement. If the corpora- 
tion purchase Crown property or advance money to the 
Crown without the consent of Parliament, it is liable to a 
penalty of three times the sum in question. The repay- 
ment of the debt may be made after August i, 1695, upon 
one year's notice, and the privileges of the corporation 
will then cease. 

From the last clause it may be concluded that in found- 
ing the Bank there was no thought of creating a loan 
institution of permanent utility. Its economic value was 
wholly unappreciated, since its existence was to cease a 
year after it should become possible to cancel the govern- 
ment debt. The reservation to the Government of such 
a right to terminate at notice was not unusual where cor- 
porations were concerned. It was, however, not usual 
to make use of it tmless the company exceeded its privi- 
leges. It was only a threat by means of which the good 
behavior of the corporation might be secured.'^ 

The prerogative of erecting corporations belonged to the 
Crown. The King exercised this prerogative either by 
giving his consent to an act of Parliament declaring the 
formation or by the grant of a charter in cases where the 

a Burnet, "History of his Own Time," Vol. II, p. 209. 

71 



National M on et ar y Commission 

act of Parliament permitted the erection of a corporation 
in futuro.^ The Bank received its charter on July 27, 
1694. No privileges were conferred upon it thereby ex- 
cept those which it received by virtue of being a corpora- 
tion; the conditions regulating the election of officials, the 
independence of the corporation's property, the ability to 
sue and be sued, a common seal, the right to make by- 
laws agreeable to the general laws of the Kingdom. ^ 

If the privileges granted to the Bank by act of Parlia- 
ment are examined it will be found that they relate only 
to the credit facilities afforded and to commercial transac- 
tions. The latter are limited to trade in the produce of 
the corporation lands, and in gold and silver bullion. 
The loan transactions include : Dealing in bills of exchange, 
loans on pledges deposited (with the right to sell such 
pledges itself), and loans on mortgage. The borrowing 
transactions were not specified. It might receive money 
on any terms whatever, so long as its liabilities did not 
exceed the amount of the government debt. This debt 
formed its capital stock. Should the Bank wish to issue 
notes, it might do so up to the amount of the debt. Notes, 
bills of exchange, and other debts of the Bank were all 
looked at from the same point of view. They were the 
liabilities of the company, and their security rested upon 
the government debt. 

There is no indication of any intention to give the Bank 
a share in the management of the public debt or of the 

o Blackstone, Commentaries (edition 18^0), Vol. I, pp. 272, 472. 

b See an extract from the charter of the Bank of England in McCulloch's 
"Treatise on Metallic and Paper Money and Banks," p. 455. Anderson, 
a. 1 694. [There is a reprint of the charter and by-laws in Lawson's " History 
of Banking." H. S. F.] 



73 



The English Banking System 

public money. To say that by the provisions of the act 
which founded it the Bank undertook the functions of 
the Exchequer, is untrue. This was neither embodied 
in the act nor was it immediately put into practice. The 
voluminous act, suffering in form from the usual clumsi- 
ness of English laws, contained in fact only a few princi- 
ples of administration and left it entirely to the practical 
constructive powers of the Bank directors to find the 
necessary rules for the development and conduct of the 
Bank. The incomplete nature of the bank act certainly 
appears as an advantage when constrasted with the 
detailed provisions for organization and administration 
with which the German banks of the eighteenth century 
were equipped by law. It very soon appeared that the 
Bank could be managed satisfactorily without such pro- 
visions. It carried on its business with success and soon 
its credit with the general public was higher than that of 
the goldsmiths had been. It lent money at 5 per cent 
on mortgages and on real security. Foreign bills of 
exchange were discounted at 4K per cent, inland bills at 
6 per cent. The Bank's customers could obtain discount 
on the former at 3 per cent, and on the latter at ^% per 
cent. The goldsmiths had charged 10 per cent. The 
bank bills were payable on demand and, like all other 
credit notes, bore an interest of 2d. a day per £100 — i. e., 
rather more than 3 per cent. The goldsmith's notes had 
carried no interest.® 



a Michael Godfrey, "A Short History of the Bank of England," London, 
1695 (reprinted in John Francis's "History of the Bank of England," London, 
1848, and in Lord Somers's Tracts, Vol. XI). Godfrey was a director of 
the Bank in 1694. 



73 



National Monetary Commission 

But the Bank was of most importance in relation to 
the pubHc credit. It cashed the government bills. Bills 
when drawn on safe funds such as the land tax, and due in 
three or four months, had uaually been at a discount of 
2 per cent, which discount had risen to 30 per cent in the 
case of other funds, and when the interval before the bills 
fell due was greater. But now the Bank raised the credit 
of these bills so high that they were soon above par, and 
since the Government paid 7 or 8 per cent on them, were 
more sought after than bills of exchange. By thus cashing 
the bills representing the floating debt the Bank demon- 
strated at once, and most clearly, its usefulness to the 
Government. This usefulness appeared yet more clearly 
when the government bills declined in value owing to the 
bad state of the currency, and the Bank, in order to 
restore the credit of the bills, proposed an increase of its 
capital, as subscriptions to which the bills might be paid 
in at their nominal value. 

In 1697 a new bank act was passed (8 and 9, Will. & 
Mary, c. 20) allowing the Bank to increase its capital stock 
in the way mentioned. The subscriptions, which were 
not limited in amount, were to be paid one-fifth in bank 
notes and four-fifths in government bills. This is the 
first consolidation of floating debt in England. The Bank 
received interest at 8 per cent on the capital thus 
obtained and was allowed to increase its note issue up to 
the amount of the new subscriptions. 

The provisions of the act of 1697 were an extension of 
the original bank act. The privileges conferred by the 
latter remained unaltered, v/hilst a new and important 



74 



The English Banking System 

one was added. It was enacted that, so long as the 
Bank continued, no other bank, corporation, or company 
of the nature of a bank should be allowed by act of Par- 
liament. It was this act, therefore, which first gave 
the Bank an exclusive privilege, a privilege limited in 
time indeed, since after August i, 1710, the Bank might 
be dissolved under conditions similar to those stated in 
the original act; but, as we have already pointed out, no 
definite significance was to be attached to such a warn- 
ing clause. The privileged position of the Bank was not 
yet, however, completely secured, since the undertaking 
that no other bank should be authorized by act of Parlia- 
ment did not prevent the transaction of banking business 
by companies already in existence. But in 1708 the 
Government was again in need of money and had recourse 
to a loan; and the Bank then took the opportunity to 
secure a full monopoly through the act which authorized 
this loan. This third act (7 Anne, c. 30) authorized the 
Bank to advance £400,000 to the Government and re- 
duced the interest on the total debt to 6 per cent. At 
the same time the Bank undertook to cash the exchequer 
bills, a species of government note. In return it was 
enacted that during its continuance no company consist- 
ing of more than six persons should issue bills or notes in 
England, which were payable on demand or within six 
months of the date of issue. This clause was intended to 
secure and protect the exclusive banking rights of the 
Bank of England. Although in fact it only for the bene- 
fit of the Bank of England forbade the issue of notes by 
any other company having more than six members, it was 
interpreted by contemporary opinion to imply that the 



75 



National Monetary Commission 

business of banking in general might not be carried on by 
such companies. As is well known, this legal error was 
not recognized until 1835. 

These three acts together formed the basis of the Bank 
of England's position until the beginning of the nineteenth 
century. It would be impossible to deduce this position 
from the original act alone, but it is not necessary to take 
into account the acts passed after 1708, since they add 
nothing essential. The provisions set forth in these 
original laws relate only to the economic condition of the 
Bank. 

The Government had conferred upon it banking rights 
and had determined the sphere of its operations in accord- 
ance with the opinions then held of the functions of a 
bank; but had refrained from influencing the particular 
form of its transactions, or the disposal of its resources, or 
the creation of liabilities. 

The restrictions of the note issue and liabilities to the 
amount of the capital stock can not be looked upon as 
an administrative principle any more than the permanent 
clause forbidding loans to the Government without pre- 
vious authorization from Parliament. The first rule was 
only inserted in order that the extent and starting point 
of the shareholders' liability might be legally determined; 
it was not repeated after 1708. The latter clause arose 
out of the constitutional and not out of the economic 
preoccupations of Parliament. The relation of the Bank 
to the Government was thus marked off by no legal regu- 
lation. The Bank is neither a government institution 
iior under government influence, and in this respect differs 
essentially from the continental banks founded either at 



76 



The English Banking System 

the same time or during the eighteenth century. Its only 
connection with the Government was of an economic 
character. For the State the Bank was an indispensable 
institution for the supply of credit facilities, an institu- 
tion which it had indeed created by the grant of a monop- 
oly, but with regard to the conditions of whose existence 
it troubled no further. The fact that in spite of this the 
bond between the Bank and the Government has come 
to be indissoluble is to be explained by the growth of 
particular connections, which, however, have not affected 
the legal relations of the two. 

With regard to the Bank's relation to the administra- 
tion of finance in particular, we have seen that no refer- 
ence is made to this in the original act. Nor was the 
relation subsequently regulated by law. In fact the con- 
nection grew up in the course of the next century without 
receiving any legal regulation whatever. The practical 
administration of the finances was gradually subjected to 
such modifications as ended in the assumption by the 
Bank of the functions of the Exchequer, while, owing to 
the peculiar evolution of the system of public indebted- 
ness, the Bank received a share in the administration of 
the debt and ultimately took over its entire management. 
This development had some connection with the eco- 
nomic monopoly granted to the Bank, since the Govern- 
ment was further stimulated by it to continue this 
monopoly. 



77 



PART II. 

THE RELATIONS BETWEEN THE BANK AND THE ADMINIS- 
TRATION OF THE PUBLIC DEBT AND OF THE PUBLIC MONEY 
DURING THE EIGHTEENTH CENTURY. 

Even a general history of the Bank of England must, in 
reference to the eighteenth century, be concerned pri- 
marily with the Bank's relations to the Government. 
And this not only because during this century its financial 
assistance became specially important, but more particu- 
larly because it was these relations which gradually 
secured for the Bank a share in the financial administra- 
tion, and hence, in the natural course of things, strength- 
ened and maintained its monopoly. This transference 
of public business to the Bank was made in two different 
directions, in a completely independent way. Its par- 
ticipation in the management of the public debt developed 
quite apart from its participation in the administration 
of public money. The one function did not lead to an 
increased exercise of the other, except that the transac- 
tion of government business in either department resulted 
in a general increase in the importance of the Bank's 
position and the respect with which it was regarded. The 
Bank's cooperation in these branches of financial admin- 
istration received no legal sanction during this century. 
By the end of the century it was, however, clear that the 
natural strength of tradition and the influence already 
won would secure it a permanent and definite share in the 



78 



The English Banking System 

financial administration. But just as its administration 
of the debt and its administration of the pubhc money were 
substantially distinct and developed independently in fact, 
so the growth of its activities in these directions was not 
uniform. The year 1751 marks the time after which it 
seems to have been accepted that the Bank alone should 
share in the management of the public debt, although this 
opinion found no legal expression. Suggestions made at a 
later date to withdraw the management of the debt from 
it were without effect. As regards the public money, it 
was not until much later, in 1780, that the Government 
seriously considered the principle that this should be man- 
aged by the Bank. The previous development had been 
independent of any law or administrative order. The 
measures taken after 1780 lose, however, all significance 
unless they are connected with the working out of this 
principle during the early decades of the nineteenth 
century. Hence, it is advisable to arrange in chronolog- 
ical order our account of the process by which the Bank 
came to take part in the management of the public debt 
and public money. However the several phases of this 
development are distributed within our period, it is 
indubitably the central characteristic feature of the his- 
tory of the Bank during the eighteenth century. It was 
not until the beginning of the nineteenth century that the 
need for a reorganization of the financial administration 
in both departments led to a legal recognition of the posi- 
tion developed during the eighteenth century. Hence 
the description of this position in what follows does not 
end exactly with the century. 



79 



National Monetary Commission 



I. THK BVOIvUTlON OF THE NATIONAI^ DEBT AND OF ITS 

ADMINISTRATION. 

A. The principle of the incorporation of public debt as 
recognized at the foundation of the Bank, and its subse- 
quent application. 

I. THU PRINCIPLE) OF INCORPORATION. 

Had there been any intention in founding the Bank to 
create a loan institution by whose means money could be 
more easily raised on the short-term paper, no disappoint- 
ment need have been felt, as we have already remarked, 
with regard to the Bank's efficiency in this matter. The 
very first return issued by the Bank, which was laid before 
the House of Commons on November lo, 1696, shows 
clearly the important share taken in the business con- 
nected with the government bills. The Bank held 
£1,784,576 in tallies on various funds, out of total assets 
amounting to £2,101,187.^ But this assistance, repeated 

a The return is published in the Journals of the House of Commons, 
1696, and also by various writers, e. g., Fairman, loc. cit., p. 46, and is 
as follows: 



To sealed bills out- 


£ 




s. 


By tallies on several 






standing 


893, 


800 




parliamentary se- 


£ 


s. 


To notes for run- 








curities I, 


784.576 


16 


ning cash 


764, 


196 


10 


By half a year's de- 






To money borrowed 








ficiency of the 






in Holland 


300, 


000 




fund of £100,000 






To interest due on 








per annum 


50, 000 




bank bills out- 








By cash, pawns, 






standing 


17, 


876 




mortgages, etc . . . 


266, 610 


16 




1.975. 


872 


10 




Rest 


125, 


315 


2 








* 


2, lOI, 


187 


12 


2 


loi, 187 


12 



80 



The English Banking System 

and permanent though it was, did not constitute the 
chief significance of the Bank of England for pubHc 
credit. The Bank owed its very existence to a govern- 
ment loan transaction. The loan act of 1694 bestowed 
the privilege of a corporation upon the public creditors, 
and this promise was carried out by the charter of July 27. 
The Bank of England was thus formed into a company 
for the transaction of banking business, whose capital 
stock consisted of a loan to the Government. Over this 
loan the Bank had no control. It could not be redeemed 
as far as the Bank was concerned, but was only repayable 
at the desire of the Government. This, if we neglect the 
bankers' debt, which owed its existence to a passing 
impulse, marks a new principle in the administration of 
debt. The foundation of the Bank of England forms the 
transition from the system of floating to that of funded 
debt, and it is perhaps not a mere chance that the method 
selected was that of incorporating the government 
creditors into a privileged company. Similar incorpora- 
tions of government debts are phenomena which continu- 
ally recur in the history of state systems of credit. 
They are especially frequent in Italy, and it is most 
probable that the banks of Genoa and of Venice came into 
existence in this way.^ It is not unreasonable to sup- 
pose, considering the constant attention with which all 
European banks were studied by Englishmen at the end 

C' Cf. Endemann, "Studien zur rom. Kan. Wirthschaf tslehre, " p. 438, 455; 
with reference to the Bank of Genoa, see a monograph by Prince Adam 
Wiszniewski, "Histoire de la banque de Saint-Georges," Paris, 1865, p. 2 
et seq., p. 17 et seq.; Vetor Sandi, "Principii della storia de la republica de 
la Venezia," Vol. II, p. 148 et seq.; Vol. VI, p. 892 et seq. gives some par- 
ticulars of the brigin of the Bank of Venice. 

68299°— II 6 81 



National Monetary Commission 

of the seventeenth century, that the history of the creation 
of these banks influenced the manner in which the Bank 
of England was estabUshed. Indeed, the repetition of 
such loans during the decades immediately following the 
foundation of the Bank makes it almost appear as if the 
principle of incorporation had become a recognized rule 
for the administration of debt. In any case, it became 
of great importance in the later developments of the 
administration of public debt in England, owing to the 
type of management to which it led. 

The few important loans which had hitherto been 
authorized by Parliament, the annuity loan in 1693 and 
the lottery loan in 1694, were managed by the Exchequer. 
The Government, which was obliged to deal directly 
with each individual creditor, had the books relating to the 
loans kept at the Exchequer. In these books transfers 
were recorded, reference to them determined claims of 
ownership, verification of lottery tickets, etc., and in them 
due payment of the interest was entered. The debt to 
the Bank of England was different in form. In this 
case the Government had but one creditor, the Bank, to 
whom it owed the entire amount of the loan; but the 
repayment was under its own control. The interest on 
the loan had to be paid in a lump sum. Hence the 
management of the debt passed out of the hands of the 
Government. Its function was confined to the transfer 
from the Exchequer to the Bank of the sum required to 
pay the interest 

The business formerly connected with the management 
of the public debt passed to the Bank. But the Bank 



82 



The English Banking System 

merely administered its own capital like any other com- 
pany. The individual who had contributed something 
to the government loan and had thus become a member 
of the corporation established by act of Parliament and 
charter, had in fact no claim on the State; he was simply 
entered in the books of the corporation as entitled to such 
and such a share in the capital of the company, i. e., in 
the public debt. He could not claim interest from the 
Government, but the amount corresponding to his stock 
was allotted to him out of the interest assigned to the 
company by the Government. If he alienated his claim 
to capital and interest and the corresponding transfer 
was entered in the books of the Bank, the property thus 
transferred was in fact a claim on a public debt. This is 
the position which resulted from the ''incorporation of 
the national debt." The public creditors were formed 
into a corporation in order to administer the debt, which 
was managed like the ordinary working capital of a 
company. 

At the same time the management of the company's 
business appeared as an essential part of the transaction, 
so that anyone who advanced money to the Government 
might expect to receive a profit from the business trans- 
actions as well as the regular interest paid by the State. 

Hence, such loans could not fail to be a success, espe- 
cially as the original subscribers had the prospect in any 
case of a profit due to a rise in the price of the capital 
stock. And indeed it must be attributed to this cir- 
cumstance that, even during the times of scarce money 
at the beginning of the eighteenth century, the Govern- 



83 



National Monetary Commission 

ment obtained supplies not only by adding to the capital 
stock of the Bank of England, but also by the creation of 
new companies." 

2. THE ATTEMPT TO ESTABLISH A LAND BANK. 

Even in 1695 an attempt was made to found another 
such institution. A land bank was to be created which 
on the one hand was to raise a loan on mortgage, and on 
the other was to supply the Government with means to 
carry on the French war. 

The act 7 and 8 Will. Ill, c. 31, made perpetual a law 
passed in 5 and 6 Will. Ill imposing certain taxes 
on salt and earthenwares, and set aside the sums thus 
raised for the payment of such persons as should, 
upon this security, advance £2,564,000 before August i, 
1696. The subscribers were to form a corporation 
under the title of ''The Governor and Company of 
the National Land-Bank," and to have the right to 
invest in landed property and to undertake the adminis- 
tration thereof. The shares in the original stock were 
divisible and transferable. The subscribers were to be 
paid 7 per cent per annum out of the proceeds of the 
above-mentioned taxes on the amount subscribed. The 
Bank of England was expressly forbidden to subscribe. 
No official of the one company might hold shares in the 

<^ Persons were not wanting, however, who lamented this circumstance, 
" The Public Creditors, by being removed from the Exchequer, have not 
the same Security of the National Faith and Justice for the punctual 
Payment of their Principal and Interest, which they had before, but are 
too much exposed to the Danger of becoming, one Time or other, the 
Property of their Managers." ("Some Considerations on the National 
Debt," London, 1729. p. 72.) 



84 



The English Banking System 

other; in fact no person might hold stocks in both com- 
panies at the same time, under penahy of forfeiting them. 
The company was forbidden to lend money to the Crown 
without the consent of ParHament under penalty of for- 
feiting the sum lent, one-fifth of which sum was paid to 
the informer, while four-fifths were devoted to public pur- 
poses. All the privileges of the corporation ceased on 
repayment of the debt, which repayment was only pos- 
sible after a year's notice. The trustees elected by the 
subscribers of the loan drew up, on August lo, 1695, a 
settlement determining the organization and adminis- 
tration of the Bank, which was accepted by the share- 
holders and registered by the court of chancery. This 
authorized the trustees to take up mortgages on land up 
to three-fourths of its value at an interest of 3 X to 4 per 
cent. They might issue bills up to the amount of their 
outstanding claims, which bills were to bear interest at a 
rate fixed by the trustees. These bills were to be cashed 
on repayment of the capital lent, and were to be called in 
for this purpose. A reserve fund was, however, to be 
established so that the convertibility of the bills might 
not rest entirely on security in real property. Should the 
loan not be repaid the trustees might use legal means to 
recover it. 

The land bank, however, never came into existence. 
The act stipulated that a quarter of the subscriptions must 
be paid at once and the rest before January i, 1696, under 
penalty of forfeiting the claim on the amount paid in. 
The subscription list was filled within ten days of its 



85 



National Monetary Commission 

issue, but the money was not paid in, and hence the whole 
project fell through. « 

3. THE EAST INDIA COMPANY. 

In 1600 Queen Elizabeth granted to a company of mer- 
chants, by means of letters patent, exclusive rights to trade 
with all countries between the Cape of Good Hope and the 
Straits of Magellan. The capital of the company 
amounted to £72,000 in £50 shares, and was, after some 
years, amalgamated into a joint stock company (161 3). 
Under the name of "The Governour and Company of 
Merchants of London trading into the Bast Indies," it 
carried on its exclusive trade until the time of the Com- 
monwealth. Cromwell dissolved it in 1655 and made the 
trade free. In 1661 it was reinstated by Charles II and 
its charter was afterwards renewed from time to time. 
In 1693 it forfeited its privileges on account of the non- 
payment of a 5 per cent tax imposed on its capital, but in 
the same year it was reconstituted and its charter ex- 
tended until 1 701. The capital of the company now 
amounted to £744,000.^ The granting of all these char- 
ters was an exercise of the royal prerogative which laid 

oin contradiction of the statement made by various authors that no 
subscriptions were offered, see Ralph, " History of England," Vol. II, p. 658, 
and also the settlement which was not drawn up until after the subscription 
had taken place. This settlement is printed in Lord Somers' Tracts, Vol. 
XI, "The Settlement of the Land Bank." Although never carried out it is 
of great interest as the first attempt at an institution for making loans on 
mortgage, and its substance is given in Appendix II. 

& Return on Public Income and Expenditure, II, p. 532. In 1772-3 the 
House of Commons appointed a committee to inquire into the position of 
the East India Company, the first report of which contains a list of the 
charters granted to the company. 



86 



The English Banking System 

the company under no obligation to the Government and 
did not make its existence depend on the fulfilment of 
any such obHgation. But in 1698 the rights of a corpo- 
ration and trading privileges were promised to any person 
or persons who should advance to the Government two 
millions at 8 per cent. This proposal was embodied in 
an act of ParHament, 9 and 10 Will., Ill, c. 44, as had been 
done in the case of the Bank of England four years pre- 
viously, and of the intended land bank. 

This act of Parliament ^ increased and prolonged some 
existing taxes, imposed new ones, and vmited the whole 
proceeds into a fund out of which an annuity of £160,000 
was to be paid to the subscribers of the two millions. 
The subscriptions, from which the Bank of England was 
again excluded, must be not less than £100 each. One- 
tenth of the sum must be paid at once and the remaining 
tenths at intervals of two months. If the first tenth were 
not paid in, the subscription was to be canceled. If the 
remaining portions were not paid, the first payment was 
to be forfeited and the £160,000 annuity was to be pro- 
portionately reduced. In order that the Government 
might obtain the use of the money sooner, it was empow- 
ered to issue tallies, which were to be paid every three 
months by the commissioners appointed to receive sub- 
scriptions, and which bore interest at 8 per cent. The said 
commissioners must enter all subscriptions accurately in 
a book and send duplicates of these entries to the Ex- 
chequer, which duplicates were there registered by the 

c^The title is " An Act for raising a sum not exceeding two millions upon 
a fund for payment of Annuities after the rate of eight Pounds per Centum 
per Annum, and for settling the Trade to the East Indies." 



87 



National Monetary Commission 

auditor of the receipt and the clerk of the pells. Each 
subscriber could obtain gratis a sealed copy of the entry 
which concerned him. The money thus subscribed was 
to form the principal stock of a corporation into which all 
the subscribers were constituted by means of letters pat- 
ent from the King. The corporation was to be called 
**The General Society intituled to the advantages given 
by an act of Parliament for advancing a sum not exceeding 
two millions for the service of the Crown of England," and 
under this name it was to enjoy "perpetual succession and 
the use of a common seal." The subscribers were to elect 
25 trustees in a general meeting, at which only those who 
had subscribed at least £500 might vote, and none had 
more than one vote. Each trustee must have subscribed 
at least £2,000. The members of the society had exclu- 
sive rights to trade to the East Indies and to such coun- 
tries in Asia, Africa, and America as lie between the Cape 
of Good Hope and the Straits of Magellan. But no one 
might trade for more than the amount of his share in the 
principal stock. 

The claim to the annuity paid by the Government was 
a claim owned by each individual member in proportion 
to the amount of his share. If, however, the subscribers 
wished to form a joint stock company they might be rec- 
ognized as such; but the company so formed was to be 
"restrained to such portion of the trade in the whole as 
all the particular members thereof would have been enti- 
tled to" had it not been formed. In this case the Gov- 
ernment annuity would be paid to the company. The 
members must trade only as a company and must take an 



The English Banking System 

oath to ''be faithful to the General Society" and not to 
trade for more than the allowed amount. Out of regard 
to the existing privileges of the Bank of England the com- 
pany was expressly forbidden to advance money, to dis- 
count bills of exchange or other bills or notes, or to borrow 
any money beyond what was required to buy goods or 
commodities for exportation, to issue bills of exchange 
payable in less than six months, or to " keep any books or 
cash" for any person or corporation. In common with 
the Bank of England, however, its annuities and shares 
were exempt from taxes, and no member could be adjudged 
bankrupt in respect of his stock only. The existing " Com- 
pany of Merchants" was to remain undisturbed until 
September 29, 1701, notwithstanding the privileges 
granted to the General Society. 

The establishment of the new society was due to the 
refusal of the existing company to make a loan of more 
than £700,000, whereupon, at the request of the treasurer, 
Montague, a number of merchants came forward and de- 
clared their willingness to advance two millions at 8 per 
cent in return for the privileges later set forth in the act. 
In spite of various petitions from the East India Company 
and vigorous opposition in Parliament, the act was 
forced through.^ On September 3, 1698, the corporation 
received its charter as the ''General Society," etc. But 
on September 5 it was constituted at its own request into 
a joint-stock company and received the name of "The 
English Company Trading to the East Indies." The older 
company, being unable to prevent the formation of the 

O'Ci. Smollet, "History of England," London, 1758, Bk. vi., p. 245. 



89 



National Monetary Commission 

new competing society, had itself taken part in the sub- 
scription and had contributed £315,000.^ This poUcy 
proved advantageous, since the new company quickly be- 
came prosperous and soon sent out twice as many goods as 
the older one,^ though it always kept within the legal limits. 

The relations between the two companies were, more- 
over, friendly, so that on July 22, 1702, an indenture of 
amalgamation, approved by the Queen, was agreed to/ 
The older company agreed to purchase sufficient stock 
from the English Company to make the holdings of the 
two equal. For seven years the management remained 
separate and the profits were divided. After this a single 
company was formed imder the name of "The United 
Company of Merchants of England Trading to the East 
Indies." This United Company advanced £1,200,000 to 
the Government without interest and received in return 
permission to borrow money to the amount of one and one- 
half millions, or to call in money from its members. Also 
its trading privileges were extended until March 25, 1726, 
after which date the corporation might cease upon three 
years' notice, on condition that all government debts to it 
were repaid. 

The total government debt to the East India Company 
was now (1709) £3,200,000, for which £160,000, i. e., an 
interest of 5 per cent, was paid. 

o This and the change of name is referred to in 6 Anne, c. 17. 

& T. Cunningham, "The merchant's Lawyer or the Law of Trade in 
General," London, 1762, reckons the value at a million pounds, as com- 
pared with £500,000 for the older company. 

c The essentials of this indenture are contained in 6 Anne, c. 17. The 
detailed settlement of all controversial points was intrusted to Sidney, 
Earl of Godolphin, the Lord High Treasurer. 



90 



The English Banking System 

4. THE SOUTH SEA COMPANY. 

In spite of the enormous loans which were raised through 
the foundation of the Bank of England and the General 
Society, and through the union of the latter with the East 
India Company, and in spite of lottery and annuity loans, 
the government debt, through anticipation by tallies and 
through arrears of payment, still continued. They were 
extended from one year to another and led not only to a 
heavy burden in interest, but to confusion throughout the 
public finances. They consisted of bills issued in different 
years, varying in amount and interest, falling due at dif- 
ferent times, and charged on a corresponding number of 
different heads of revenue. Whatever security was gained 
by the creditors through the ear-marking of a definite fund 
led to the inseciu'ity of the whole floating debt, because, 
owing to the imcertainty of the receipts, there was no 
covering for certain debts, while in other departments 
there was a surplus, which could not, however, be diverted. 
The value of the short-term bills had consequently fallen 
considerably, as had been the case before the foundation 
of the Bank. As the act establishing the South Sea Com- 
pany states : A "great part of the tallies and orders * * * 
are in the hands of the respective treasurers or paymas- 
ters * * * and cannot be disposed of without great 
loss and discoimt, and to the damage of the public credit; 
and other part of the tallies and orders ^ ^ ^ are or 
may be in the hands of such person or persons as may be 
better pleased with the perpetual interest, after the rate of 
six poimds per centum per annum, redeemable by Par- 
liament * * *." 



91 



National Monetary Commission 

Hence in 171 1 it was decided to consolidate the whole 
floating debt into an interest-bearing fund, which might 
be repaid, but which could not be realized at the will of the 
creditor. It was believed that this was impossible unless 
the creditors received special privileges. Consequently 
recourse was had once more to the approved method of 
granting corporation rights and trading privileges to them, 
The South Sea Company was thus established by 9 
Anne, c. 21, which act, as usual, contained also other 
disconnected provisions.^ The principal contents, so far 
as they concern the South Sea Company, are as follows: 
After enumerating all the outstanding unfunded debts, 
certain duties referred to in 8 Anne, c. 13, which had been 
imposed in previous acts continued thereby, were now 
made perpetual; their proceeds were assigned to the pay- 
ment of a 6 per cent annuity to the creditors, and were to 
be handed over to the commissioners of customs, excise, 
and stamps. The commissioners were to keep such mon- 
eys apart and to pay them weekly into the Exchequer, 
where they were to be assigned to a fund for the above- 
mentioned payment. If this fund proved deficient in the 
course of the year the deficit was to be made up by the 
treasurer of the navy out of "such public money, tallies, 
orders, or other parliamentary securities" as were in his 
hands at the time. The cashier of the corporation to be 
erected was to give a receipt to the treasurer for these 
sums, which receipt was to be admitted as sufiicient 

O' The title is " An Act for making good Deficiencies and satisfying the 
pubUc Debt and for erecting a corporation to carry on a Trade to the South 
Sea and for the encouragement of the Fishery and for Liberty to trade in 
unwrought iron with the subjects of Spain and to repeal the Acts for 
registering seamen." 



92 



The English Banking System 

voucher for the treasurer's accounts. In order to make 
this transference of money as simple as possible, an esti- 
mate, based on a three-yearly average of the amount the 
funds would produce, was to be laid annually before Par- 
liament, so that it might make ''good and timely provi- 
sion" to meet any deficiency." Any surplus was to be 
applied to repaying the principal debt. All persons con- 
cerned in the debts in question might be incorporated by 
Her Majesty by letters patent. 

The corporation thus formed was to have the exclusive 
privilege of trading to the South Seas and to the east coast 
of America from " the river of Aranoco to the southernmost 
part of the Terra del Fuego " and to the whole of the west 
coast and to all places within 300 leagues of the coast. 
The Portuguese colonies were excepted, and the entire 
trade of the company was to be confined to the districts 
indicated. The stock was exempted from the operation 
of the bankruptcy laws, and both it and the annuity were 
exempt from taxes. By Clause XLVIII the transactions 
of the company were limited out of regard to the privileges 
of the Bank of England, in the same way as those of the 
Bast India Company. No person might be at the same 
time director or governor of the Bank and of the South 
Sea Company. The company might issue bonds imder its 

a This use of the money assigned to the navy was the less remarkable 
since the navy was universally looked upon as the department whose 
credit was the best. In the first of the four letters on the national debt 
already referred to ("The Debts of the Nation, stated and considered in four 
papers, 1712," Lord Somers' "Tracts," Vol. XIII) the amount of the navy 
debt was accounted for by the fact that the deficiencies in public supplies 
were met out of the money assigned to the navy. " You need not be told, 
that far the greatest part of the other pubHck services admit of no credit 
at all; nor could any other credit of any kind have been had at so easy terms 
asin the navy" (p. 310). 



9^ 



National Monetary Commission 

common seal, by means of whicli its shares were transfer-- 
able on simple indorsement. After December 25, 1716, 
the debt was repayable by the Government upon one year's 
notice, and the company's privileges were to cease after 
such repayment had been made. 

The debt incorporated by this act consisted of three 
parts: (i) Bills issued before March 25, 171 1 (with the 
exception of exchequer bills) ; (2) arrears of payment for 
the navy and army, for which such bills had not been 
issued, also up to this date; (3) £500,000 which was still 
needed for the current expenses of the year 1711. The 
sums referred to under heads (i) and (2) already carried 
an interest of 6 per cent, from the 25th of March to the 
25th of December. The interest was to be added to the 
capital, which, after this had been done, amounted to 
£9,177,967, and on this a yearly sum of £550,678 was 
paid. 

The foundation of the South Sea Company was the last 
time corporation rights were granted to public creditors. 
Henceforth the grant of economic privileges ceased to be 
a bait by means of which the capital of private persons 
might be secured for the purposes of public finance. On 
one other occasion only the grant of a charter was made 
conditional on a money payment, when the Royal Ex- 
change Assurance Company and the London Assurance 
Company were established by 6 Geo. I, c. 18. The first 
was authorized to insure ships and merchandise and to 
lend money on bottomry, and for these purposes to raise 
a capital of one-half a million sterling. The latter was a 
life-insurance company. They were to advance £300,000 
to the Government, and Parliament reserved the right 



94 



The English Banking System 

to withdraw their privileges within thirty-one years, on 
repayment of the debt. After £150,000 had been paid no 
further demands were made, and this sum became the 
purchase money of the privileges, which were never with- 
drawn.® 

From this time forward the three great companies served 
as a lever by which public credit could, in bad times, be 
raised to the position required for the satisfactory con- 
duct of public finance. The leading statesmen of the time 
were accused of bribery and of seeking personal gain 
through the foundation of the companies. Smollett calls 
them "the most mercenary and corrupt undertakers."^ 
They had made a monopoly of the banking business, had 
formally partitioned out and made a privilege of commerce. 
They had not only not decreased the public debt but had 
actually made it permanent by adherence to the prin- 
ciple, once suggested, of an annuity debt. By vigorous 
efforts the nation might perhaps have paid off the debt 
as it fell due on definite dates, and thus have freed the 
present day from its burden. <^ But the converse is also 
possible. There is no doubt that, from the point of view 

« Fairman, "An Account of the Public Funds," London, 1824, p. 140. 
Return on Public Income and Expenditure, I, p. 62 et seq. 

b Smollett, " History of England," Bk. VI, p. 246. See also Burnet, "His- 
tory of his Own Time," Bk. II, p. 209. " It was said that the Bank of England 
and the East India Company being in the hands of Whigs, they would have 
the command of all the money, and, by consequence, of all the trade of 
England." A reproach which in reality implied praise of the financial 
system. 

c Blackstone expressed a similar opinion: "And if our ancestors in king 
William's time had annually paid, so long as their exigencies lasted, even 
a less sum than we now annually raise upon their accounts, they would in 
the time of war have borne no greater burdens than they have bequeathed 
to and settled upon their posterity in time of peace, and might have been 
eased the instant the exigence was over." (Commentaries, Bk. i, p. 328, 
edition of 1830.) 

95 



N at ion al Monetary Commission 

of administration of debt the course adopted was a right 
one and was justified by its results. The development of 
national life and the consequent increased need of money 
made the management of loans an essential part of finan- 
cial administration during the eighteenth century. Thus 
from an economic as well as from an administrative point 
of view, the three great companies were the main support 
of the Government. Hardly any loan transactions could 
be managed without their cooperation; loans were raised 
either from their resources or by their intermediacy, ttiey 
administered the funded debt and helped to keep in cir- 
culation the bills representing the unfunded debt. Their 
respective relations to the State did not, however, retain 
any similarity. The starting points of their careers are 
much alike, but ultimately the Bank survived, in close 
association with the Government, whilst the other two 
ceased to" exist. In the following section we shall inquire 
into the causes which forced on the adoption of this system 
of public loans. We must, however, first consider the 
history of a form of debt which had great influence on the 
general development of English financial administration 
and determined the relation of the Bank of England to the 
Government and its victory over the other companies. 

B. History of the exchequer hills and their importance in the 

system of public debt. 

In 1696, when the silver coins which for several years 
had been much depreciated from use and clipping, and had 
fallen to one- third of their nominal value, were called in, 
it quickly became apparent that there was not enough 
available currency in the country. The minting did not 



96 



The English Banking System 

go on suiFiciently quickly. The new money was hoarded 
by its possessors for fear lest they should get old and worn- 
out coins. Bank notes were not suitable for small trans- 
actions since £20 was the lowest value issued. Attempts 
were made both by the merchants and by the Government 
to remedy this scarcity of currency, which was universally 
felt. An order that the public revenues should be remitted 
to London by bills of exchange was issued at this time, and 
this expressly "lest in a time when so much money is 
drawn from the People, to be Recoined, they should also 
be deprived of the Lawful Money remaining amongst 
them."" The Bank of England undertook the business 
of transfer in the autumn of 1696. "Such who think it for 
their Conveniency to keep an Account in a Book with the 
Bank, may transfer any Sum or Sums not under £5 from 
his own to any other Mans Accompt. "^ Even before this 
the Government had intervened very beneficially by the 
issue of "bills of credit payable upon demand at the 
Exchequer," or, as they were afterwards called, exchequer 
bills. 

The same act, which provided for a loan through the 
foundation of a land bank (7 and 8 Will. Ill, c. 31) con- 
tained a clause, inserted and passed through Parliament 
by Montague, authorizing the Treasury to issue, from time 
to time, bills of credit up to a total value of one and one- 
half millions. These bills were to be worth an even 
number of pounds (10, 20, 30, 50, 100, " or such other sums 
as shall be most convenient for the accommodation of 

(^ Announcement by the commissioners of excise, London Gazette, July 9 
to 13, 1692. 

& The bank directors give notice of this in the London Gazette, November 
23 to 26, 1696. 

68299° — II 7 97 



National Monetary Commission 

those that shah accept the same"). They were to be 
signed by an officer of the Exchequer, the auditor of the 
receipt, "sealed with the pubhc seal appointed for the 
service " by the Treasury, were to be issued by the tellers 
in the receipt of the Exchequer, and to bear the date of the 
day of issue. ^ The bills bore interest from this da.te, of 3d. 
a day per £100, i. e., about /[% per cent. "The voluntary 
acceptance thereof shall be deemed to be good Payment 
as if the persons receiving the same for Debt, Rent or other 
cause whatsoever were paid in lawfull Coins of this King- 
dom." As much coin was always kept in the Exchequer 
as was likely to be required to keep in circulation the 
number of bills issued, and, since the land bank loan did 
not come into existence, the receipts from the duties 
perpetuated by the act referring to it were devoted to this 
purpose. The sum of £4,000 was placed at the disposal 
of the Treasury for expenses of management, and the 
Treasury was made responsible for the due payment of the 
bills and for the proper limitation of the issue. The Com- 
missioners of the Treasury and the Exchequer officials were 
liable to the amount of their whole property for any issue 
exceeding the one and one-half millions. 

In 1696 the issue of these bills only amounted to about 
£160,000.^ They proved themselves useful and were 
favorably received. Arrangements had been made to 
make them redeemable in other places as well as in Lon- 
don. The manager of such an exchequer bank, as the 
offices for the purpose were called, asked for fresh bills on 

« Some information on the method of engraving and printing these bills 
and binding them into books is given in a manuscript of the year 17 13, 
which is printed in the Return on National Debt, p. 95. 

& Return on National Debt, p. 95. 

98 



The English Banking System 

September 7 and remarked that the people ''ardently- 
craved" exchequer bills, which they used in their com- 
merce. The tuckers and traders paid them to the weavers 
and combers, and these latter brought them to him.** 

The basis of the bills was, however, changed by the 
land-tax act of 1697 (8 Will. Ill, c. 6). The Treasury was 
again empowered to issue bills to the amount of one and 
one-half millions. These bills were to "be current and 
pass in all payments to any of His Majesties Receivers or 
Collectors of any Aids Taxes or Supplies hereby granted 
or that shall or may be granted for the service of the war 
for the year 1697," with the exception of the land tax.^ 
They were to be paid on demand out of the receipts of 
these taxes by all receivers, collectors, etc., to whom they 
were presented, and payment of taxes with them was 
good and legal payment. The clause concerning interest 
was omitted in this act, but was added in the act passed 
shortly (three months) afterwards (8 and 9 Will. Ill, c. 20). 
This later act contained further important provisions. 
The bills might be used in payment of all taxes and duties 
whenever voted, with the exception of the land tax. The 
interest was increased to 5d. per day on £100. It was, 

<^ Treasury Papers, 1696, Vol. XL, N. 10. 
& The form of these bills was as follows : 

Exchequer, 

, 1697. 

No. . 

" By virtue of an Act of Parliament passed in the VIII year of his Ma^^*^^ 
Reign, this Bill entitles the Bearer to Five Pounds, to pass in all payments 
to Receiv^^ or Collectors of any Ayds Taxes or Supplys for the service of 
the war for the year 1697 (except y® III Shilling Ayd) to be reed and 
satisfied by y® said Receiv^*^ or Collect^^ under y® Penalties in y*^ Act con- 
tained" (Return on National Debt, p. 97). Similar government notes 
covered by funded receipts from taxes were issued in Denmark as early 
as 1673. Cf. Marperger, " Beschreibung der Banken," p. 321. 



99 



National Monetary Commission 

however, only paid for such time as the bill remained in 
circulation. Hence the bills were to be signed and dated 
whenever they were paid into the Exchequer or any other 
government office, or whenever presented by the holder 
to be cashed, or on all occasions when they were reissued 
by the offices concerned.^ For the greater security and 
convenience of the public the Treasury was authorized to 
contract with any persons for exchanging and circulating 
the exchequer bills. Such persons were to receive as a 
bonus lo per cent on the sums subscribed by them to 
insure that the bills should always be cashed. On April 
9, 1697, the Treastuy deposited in the Guildhall books 
for the registration of subscriptions. The amount was 
for the time to be £400,000. On April 23 the subscribers 
met and elected twelve trustees to manage the money 
subscribed.^ The money promised was called in grad- 
ually up to the end of July, and at the end of September 
the trustees made up the accoimts of their management 
and paid 14s. lod. on every £100 out of the interest re- 
ceived from the Treasury for the bills held by them.^ In 
the same year the amount for which the exchequer bills 
were issued was reduced to £5. On May 21, 1697, the 
Treasury instructed the auditor of the receipt. Sir R. 
Howard, "that in future you make forth no bills higher 

« This gave occasion for frauds in the Exchequer since the officials 
recorded erroneous dates for the reissue and appropriated the interest. 
Such a fraud, perpetrated in the autumn of 1697, is circumstantially de- 
scribed in the Return on National Debt, p. 97. 

f> See the announcement by the Treasury in the London Gazette, April 
5-8 and 19-22. Among others the East India Company subscribed 
£80,000. It called attention to this later when petitioning against the 
establishment of a new East India Company. 

c London Gazette, April 22-26, April 24-27, May 15-July 19, August 
30-September 2. 



100 



The English Banking System 

in value than £5 or £10,"^ and since it was known that 
some of the bills were "irregularly" indorsed, these were 
called in at the end of 1697 and exchanged for new ones.^ 

The exchequer bills secured a permanent place in Eng- 
lish public finance from the moment of their first issue. 
In 8 Will. Ill, c. 24, it was decided to issue another 
£1,200,000 worth of bills. These were issued and kept in 
circulation in the same manner as before. 9 Will. Ill, 
c. 2, arranged for an exchange of the outstanding bills, 
which were overcrowded with indorsements, and were thus 
no longer fit for circulation; it was provided that these 
bills should be retained as they were paid in from time to 
time to the Exchequer, and new bills for a like amount 
issued in their place. A recall of the bills for small sums 
and an issue of bills for £100, £50, and £25 as ordered 
by 12 Will. Ill, c. I. Between April 26, 1697, and August 
27, 1703, bills were issued to a total value of £3,060,000 
of which more than £500,000 worth were outstanding at 
the latter date. ^ 

The issue of exchequer bills was originally intended to 
provide a currency, to create money or a substitute for 
money, in order to improve the economic position; later 
on, however, their issue was regarded as a method of 
borrowing, which succeeded well on account of the 
security obtained by the pubhc from the circulation con- 
tract. People soon preferred the bills to money because 
they bore interest. Moreover, at the time of the next 



« London Gazette, 1697, No. 3345. 

& Return on National Debt, p. 96. 

<^' The Auditor of the Receipt had to keep accounts of the issue and repay- 
ment, and of the taxes through the receipts from which repayment was 
made. Such an account was laid before the House of Commons in 1703, 



lOI 



National Monetary Commission 

issue (1707) the national credit was more firmly estab- 
lished. "The credit of the nation was never raised so 
high in any age, nor so sacredly maintained. The 
Treasury was as exact and as regular in all payments as 
and private banker could be."« But a scarcity of money 
again made itself felt. The war of the Spanish succes- 
sion employed many troops abroad, who had to be paid 
in coin, since the use of bills of exchange for foreign pay- 
ments had not yet developed. The trade with Spain 
and the West Indies, which had formerly brought much 
money into England, was now interrupted.^ 

The Government was able on this occasion (5 Anne, c. 
13) to issue exchequer bills which bore no legal interest, 
but which might be indorsed to bear such interest ''for 
their better circulating." The Bank of England was 
empowered to determine whether interest should be paid 
and to what amount, and this time an arrangement was 
made with the Bank to circulate the bills issued, to the 
total value of one and one-half millions. This was the 
first time that the Bank luidertook independently to 
manage the circulation. In the first contract, in April, 
1697, it seems only to have been concerned as the place 
where the bills were cashed, for £100,000 was deposited 
with it to effect the exchange.^ 

a Burnet, "History of His Own Time," Vol. II, p. 438. 

& Burnet, loc. cit. 

cCf. Ret. Nat. Debt, p. 96. Here, after it has been mentioned that a 
circulation contract was to be made, a treasury minute of April i6, 1697, 
is quoted, with the remark: "The following Treasury Minute refers to the 
carrying out this last provision." The minute quoted, however, refers 
undoubtedly merely to the fact referred to in the text. A second minute 
of April 20 refers to the election of 12 trustees, 6 elected by the Bank, 6 
elected by the Treasury, to act as "overseers" and to "see daily that the 
Bank has the sum of £100,000 by them for circulating exchequer bills." 



102 



The English Banking System 

The Bank now undertook to cash on demand all 
exchequer bills issued in accordance with the act in ques- 
tion. If it thought well to allow interest on the bills in 
order to increase their credit, it must state this on the back 
of such bills as were to bear interest. The interest so 
determined must not only be paid by the Bank on presen- 
tation of the bill at any time, but must also be added to 
the value by the officers of the Exchequer when the 
bills were paid in. As before, the interest was only paid 
for the time during which the bills were in circulation, i. e., 
were not in the Exchequer. They must be cashed within 
twenty-four hours at the headquarters of the Bank. In 
case they were not cashed at all, or not at the proper time, 
the holder of the bill might bring an action against the 
Bank, and not only was '' the money so refused to be paid, 
but also Damages, besides full Costs of Suit." For 
security against forgery, books containing counterparts 
of the bills were handed over to the Bank. If the bills 
became overcrowded with indorsements or otherwise 
unusable the Treasury could withdraw them at the 
request of the Bank and issue new ones for the same 
amounts. Any issue of bills beyond the amount specified 
in the act, either with or without the consent of Parliament, 
must be agreed to by the Bank. In compensation for its 
trouble the Bank was to receive 4^2 per cent on the bills 
issued at any time, reckoned for the period during which 
they were not in the Exchequer. This allowance was 
paid out of the proceeds of the house duty, which was 
made perpetual by the act. As, however, this was already 
burdened with a loan until 17 10, it was provided that the 
allowance as it fell due quarterly should be paid in newly 



103 



National Monetary Commission 

issued exchequer bills, themselves bearing interest at 4^ 
per cent, which interest was to be paid as soon as the 
money from the house duty was available. The rights 
and privileges of the Bank were secured so long as the 
Government did not supply the money needed by the 
Bank to cash the bills and so long as the government debt 
to the Bank arising out of these transactions remained 
unpaid. Such payment could only be made upon one 
year's notice of the conclusion of the contract. 

The exchequer bills increased in significance through 
these provisions. The earlier acts all contained the stipu- 
lation that the bills, so soon as they were received in pay- 
ment of taxes and the Treasury was in a position to order 
it, should be canceled and the receipts of the fund upon 
which they were paid in charged with the amount thereof. 
The issue of exchequer bills was looked upon as an antici- 
pation of revenue. But instead of cashing them people 
agreed to receive them as payment. Instead of paying a 
debt to the Government, a debt owed by it was canceled. 
But this had hitherto been regarded merely as a tem- 
porary expedient. Now the redemption and withdrawal 
of the bills were made dependent on a future resolution in 
Parliament, which, in its turn, could only take effect on 
one year's notice to the Bank of the cessation of the agree- 
ment. The exchequer hills thus became a permanent cir- 
culating medium in the country. 

The Bank of England continued to be mainly respon- 
sible for their circulation. It is true that the ''trustees 
for circulating the old exchequer bills issued anno 1697" 
continued to act, but they were apparently chiefly con- 
cerned with the cashing of the remaining bills of that 



104 



The English Banking System 

date.^ In 1729 the then prosperous South Sea Company 
undertook the circulation of about one miUion for seven 
years without ahowance, for 2d. per day per £100 (6 Geo. 
II, c. i). But it cohapsed in the very next year and was 
not only unable to maintain the bills in circulation, but 
was obliged to borrow a million in such bills from the 
Government (6 Geo. II, c. 10). There is, however, no 
sign of further contracts with private persons. On the 
contrary, by 7 Anne, c. 7 (1708), the Bank was again en- 
trusted with the circulation of two and one-half millions 
at 2d. per cent per day, for an allowance of 3 per cent. 
The arrangements were otherwise the same as in 1707. 
In this case, too, the allowance was to be paid in exchequer 
bills until the whole debt was canceled. That of 1707 
was never canceled, since by 7 Anne, c. 7, it was con- 
verted into a funded debt to the Bank, bearing an interest 
of 6 per cent. A much-used distinction was introduced 
by the last-named act between nonspecie bills, which had 
not been returned to the Exchequer after their first issue, 
and specie bills, which had been reissued on one or more 
occasions. The Bank was only bound to cash the latter. 
This distinction was removed by 9 Anne, c. 7, and the 
Bank declared itself ready to cash all bills, for which 
purpose a fixed yearly payment of £45,000 was granted 
to it, in addition to the allowance of 3 per cent, tmtil the 
total value of the outstanding bills should be reduced to 
£1,900,000. To secure the necessary cash the Bank 
might contract loans or make calls on its shareholders, 

<2 The London Gazette, 1709, No. 4537, and 1710, No. 4684, mentions 
this in connection with the fifteenth and sixteenth, respectively, renewals 
of their contract. Their allowance was for the future only i per cent. 



105 



National Monetary Commission 

and might issue bank notes to the amount of the received 
contributions or of the sums agreed in the contract, in 
excess of the amount otherwise allowable. This act con- 
tained other provisions of some interest. 

For instance, exchequer bills for small sums of £6 5s. 
were to be issued for the convenience of trade, but besides 
these, bills of £5,000 each, not exceeding 50 in number, 
were to be issued for transactions between the Bank and 
the Exchequer. These bills afterwards played an impor- 
tant part in monetary transactions. The Bank now 
undertook to redeem the bills, but the Treasury was still 
bound, as hitherto, to cash them on demand, and a special 
officer was appointed in the Exchequer to pay the interest 
which was due. Thus the Bank and the Treasury, respec- 
tively, were under similar obligations to redeem the bills. 

The arrangements with the Bank were repeated during 
the rest of the century, whenever a fresh issue of bills 
took place. But these new agreements established no 
essentially new relationship. The only changes were in 
the amounts allowed as interest on the capital held in cash 
for the purpose of redemption, and in the rate of interest 
on the exchequer bills themselves. This was naturally 
fixed according to the general conditions of the loan 
market, and had no influence on the real position of the 
exchequer bills. From this time forward throughout 
the whole century they remained interest-bearing govern- 
ment bills which were legal tender as payment of the 
public taxes and were redeemed in coin on demand. 

A study of the evolution of the exchequer bills leads to 
the following conclusions: At their first issue in 1696 they 
were negotiable securities, payable on demand, without 

106 



The English Banking Syste 



m 



other guaranty than the pubHc credit in general. In the 
following year they received an additional guaranty, in 
that they had to be accepted in payment of taxes by any 
receiver or collector. Their security was increased by the 
appointment of an association to cash them. Their value 
now rested not only on the certainty that the State was 
obliged to receive them in payment of taxes, but also on 
the fact that a definite amoimt of private capital was set 
aside for their redemption. No formal change was made 
in the rights of the holders of exchequer bills when the 
Bank undertook the duty of cashing them. But it was not 
without influence on their value that the Government, in 
issuing them, was no longer relying on the success of a sub- 
scription, but could reckon on the support of a powerful 
bank, which commanded general respect and possessed 
valuable privileges. Moreover, the Bank, when it had 
once undertaken the business, had no motive for refusing 
it subsequently, since it received the additional right of a 
voice in deciding the total value of the bills issued. The 
exchequer bills thus acquired for the public the same value 
as the Bank's own notes, while they served as a bond 
between the State and the Bank, which bound the two 
together in ever closer relations through regularly repeated 
loans and contracts and, finally, through the funding of the 
bills into a permanent debt until the State should repay 
the capital needed to cash them. 

The value which the bills possessed as a circulating medium 
caused them to be regarded as money even when first 
issued. Thus it was stated in Pegasus of August 24, 1696, 
that the exchequer bills " will fill this nation full of money 
and make trade flourish. " Drake, a member of Parlia- 



107 



National Monetary Commission 

ment, remarked that ''They created money without Bul- 
Hon, and distributed great quantity of coin without help 
of the Mint. " ParHament was especially congratulated 
on having made money. It had ''laid a good foundation 
for Paper Money to supply the place of our Silver Coin. "" 
The historians, Tindal, Smollett, etc., credit it with this. 
But there were not wanting expressions of contemporary 
opinion which estimated such beliefs at their true value. 
The exchequer bills had never had a forced currency, their 
acceptance in private business was voluntary and depended 
on the confidence felt in their convertibility. An anony- 
mous pamphlet written in 1 710 on the nature and use of 
money and paper credit ^ combated the notion that the 
Government could create money by its bills. These could 
be nothing but promises to pay money, and their worth 
resulted only from the fact that trade required much less 
money than was generally believed. The Dutch " lock up 
the great bulk of their money in the Bank of Amsterdam, 
and make their payments by transferring from one man's 
account to another in the Bank's books, so that in propor- 
tion to their vast dealing there is nowhere so small an 
appearance of money in specie as in the greatest trading 
country in the world. " The exchequer bills were valuable 
because they effected a useful saving of specie. For this 
reason the Government should avoid any disturbance of 
the confidence felt in these bills, otherwise the demand for 
actual coin would again make itself felt. 

« "A Short History of the Last Parliament," London, 1699. 

& "A Vindication of the Faults on both Sides with a Dissertation on the 
Nature and Use of Money and Paper Credit in Trade," 17 10. It is a vindi- 
cation of a pamphlet published earlier which attacked both Whigs and 
Tories (Somers's Tracts, Vol. XIII). 



108 



The English Banking System 

As a matter of fact the English Government always 
regarded the exchequer bills as paper credit used as cir- 
culating medium, whose value depended on the confidence 
in their convertibility, and it was always careful to secure 
this convertibility. No attempt was ever made to force 
exchequer bills upon the public creditors. Thus in 1697 
the Lords of the Treasury pointed out to the collectors 
of the excise in the country that the bills which they 
procured in order to remit the receipts from the excise 
duties to London must not be exchequer bills, since the 
creditors of the excise who must be paid with the remit- 
tances could not be forced to accept such bills.^^ 

The exchequer bills fully served their purposes as a cir- 
culating medium, and the loans which the Government 
raised on critical occasions by means of these bills are a 
proof that they were voluntarily and freely accepted in 
commerce on all sorts of occasions. It has already been 
noted that in 1720 the Government assisted the South Sea 
Company by the advance of a million in bills in order to 
enable it to resume its payments. Similarly in 1793 

o Treasury Papers, 1697, Vol. XLV, May 4. 

& This procedure shows the superior foresight and prudence of the 
English financial administration as compared with the French. The notes 
issued by the Banque Royale (17 18), for which, as is well known, all the 
outstanding government debts were exchanged, had, when first issued, a 
value only for the State, since only the "bureaux de recette du roi" were 
obliged to accept them. But soon these became forced currency in com- 
mercial transactions and "enfin les billets de banque eurent cours dans 
tous les payements qui se faisaient au public, soit par le ministere des 
notaires, soit pour les remboursements que les debiteurs voulaient faire 
k leurs creanciers. " Cf. "Histoire generale et particuliere du visa fait 
en France pour la reduction et 1' extinction de tous les papiers royaux," 
Paris, 1743, I, p. 19. A forced currency was in Law's opinion indispen- 
sable to the successful development of a paper currency. Cf. Law, "Con- 
siderations sur le commerce et sur I'argent," 1720, C. VII, p. 135. 



109 



National Monetary Commission 

Parliament agreed to issue £5,000,000 in exchequer bills 
to assist the stagnant trade. « £2,202,000 was lent to 
the London merchants, Manchester received £25,000, 
Liverpool £130,000, and Bristol £40,000. This made up 
the total issued. The bills bore an interest of 2j^d. per 
day, but the borrowers paid a higher rate to the Govern- 
ment, as the South Sea Company had done. On the 
present occasion the rate was 4 per cent; on the former 
occasion, 5 per cent. 

The exchequer bills were a wholly distinct type of debt. 
Each bill was warrant for a legal, actionable claim on the 
Government to receive the said bill in payment of taxes, 
to pay the interest thereon, and ultimately to cash it, and 
for a similar claim on the Bank to cash it for the amount 
stated plus the interest due. The total issue of the bills 
involved at the same time a government debt to the 
Bank equal in value to the issued bills. This debt was 
not legally reduced by the conversion of the bills at the 
Exchequer, since its repayment was only possible after a 
year's notice. Such conversion merely resulted in a 
counterclaim on the Bank, which was obliged to cash 
the bills presented to it by the Exchequer. Hence from 
the financial standpoint the bills were circulating share 
certificates in a public debt to the Bank, which, when 
cashed by the Bank, were retained by it, but when cashed 
by the State gave rise to a counter claim. 

The bills acquired a special significance, because from the 
time of George II onward the Government, with the 
consent of Parliament, used them every year to anticipate 



0' [This is a misconception. The issue was made to allay panic arising 
from excessive expansion of credit, etc. H. S. F.] 



no 



The English Banking System 

the land and malt taxes, and they thus became the basis 
of the credit allowed by the Bank to Government for 
the purposes of current expenditure. 

This circumstance, combined with the other relations 
between the Bank and the Government which arose out 
of the exchequer bills and which we have just described, 
was the chief ground for that confidence which the Gov- 
ernment must have felt in the Bank in order to intrust 
to it the administration of the whole of the public debt. 
For in this matter the Bank had to overcome the compe- 
tition of the two other companies with which it shared the 
administration during the eighteenth century. 

C. The administration of the national debt by the companies. 

I. thS distinct characters op the companies. 

A comparison of the legal constitutions of the three 
companies shows a striking similarity in their positions 
at law. In each case the capital stock consists of a public 
debt which was only redeemable after a certain notice; 
no increase in this can be made without the consent of 
Parliament; the said capital forms a joint stock the 
shares in which are transferable in a similar manner in 
each case; they are alike exempt from taxes; the pay- 
ment of the interest on them by the Government is 
similarly managed; each has a monopoly in its own 
particular sphere of activity. The varying relations of 
the companies to the Government must consequently 
arise from the differences in these spheres of activity, and 
in this respect the Bank at once stands out as distinct 
from the other two companies. The trading privileges 



III 



National M o n et ar y Commission 

of the two latter contrast with the banking privileges of 
the former, banking privileges which were so carefully 
protected when the other two companies were founded. 
This contrast led to a fundamental distinction in their 
respective relations to the Treasury. We have already 
seen what an influence the Bank was destined to 
exercise on the management of the public money through 
its responsibility for the exchequer bills and its opera- 
tions with respect to the various government bills. The 
two others could not advance so far. The Bank exerted 
a continual influence on public credit, though its current 
business; and, in fact, its own credit became closely bound 
up with that of the Government, owing to the exchequer 
bills contract. The East India Company and the South 
Sea Company, on the other hand, could only assist public 
credit in isolated cases and in a restricted manner. 

The two companies were not, however, on an equal 
footing in this matter. The East India Company had 
from the first made vigorous use of its trading privileges 
and had carried out a consistent and successful policy, so 
that its fortunes supply an important chapter in English 
commercial history. It did not, however, concern itself 
with the financial business of the State more than its loan 
transactions with the Government demanded. It was 
different with the South Sea Company. This company 
traded only in two localities. In 1713, by the peace of 
Utrecht, it secured the trading privileges of the French 
Guinea Company, which had to provide the Spanish pos- 
sessions in America with 4,800 negroes a year and to 
dispatch thither yearly a ship of 650 tons. In 1724 it 



112 



The English Banking System 

took over the whole fishing and trade of the Greenland 
Company.^ Both enterprises resulted in a loss, in the 
latter case of £237,000 in eight voyages. 

In 1748 the company gave up the contract with Spain 
and after this carried on no trade whatever.^ Thencefor- 
ward it concerned itself still more with financial transac- 
tions, in which it was already a dangerous rival to the Bank 
of England. The trading companies could not legally carry 
on banking business proper, so that these financial trans- 
actions were only made possible by turning its capital 
stock to account. This consisted of a government debt; 
and the increased business of the South Sea Company, and 
in certain cases also of the Bast India Company, resulted 
from an increase in their capital by loans to the State or 
by incorporating existing public debts in the original fund. 
Hence their share in the administration of the public debt 
consisted in the management of individual government 
loans. Before we pass on to examine the nature of this 
management and to determine the importance acquired 
by the different companies therefrom we must briefly sur- 
vey the general development of the forms of debt during 
the eighteenth century. 

2. THE DEVELOPMENT OE THE FORMS OF DEBT. 

In spite of the free use made during the reigns of William 
and of Anne of the sources of credit opened up by the erec- 
tion of companies and the issue of exchequer bills the 
national expenditiu'e continued to increase, and more 
especially in consequence of the war with France and 

^ Founded by 4 Will, and Mary, c. 17, without financial connection with 
the State. 

& S. Fairman, loc. cit., pp. 97-98. 

68299° — II 8 113 



National Monetary Commission 

Spain. England, indeed, enjoyed only five years of peace 
between the foundation of the Bank in 1694 and the death 
of Anne in 1713. Hence the system of anticipations and 
of deferred payments did not cease with any of the great 
loans. We have already seen that the South Sea Com- 
pany was founded in order to free the public finances 
from a heavy burden of short date bills. Tallies of pro, 
navy, victualing, and transport bills, army and ordnance 
debentures were still used in the English financial system, 
side by side with the exchequer bills, as methods of obtain- 
ing credit. The tallies of pro did not disappear till 
toward the end of the eighteenth century .« They were 
then replaced partly by the more convenient exchequer 
bills, which were now in regular circulation, and partly 
by the loan debentures, a new form of debt introduced 
in 1 731 by 5 Geo. II, c. 2. 

The army and ordnance debentures, which must not be 
confused with the loan debentures, and the navy and ord- 
nance bills remained in constant use. The issue of deben- 
tures had been legalized by Parliament several times, but 
they continued to be used only for the army and the com- 
missariat departments, just as the navy and other bills 
were confined to payments of the navy and of the trans- 
port departments. These debentures and bills acquire a 
different character as soon as, under William and Anne, 
the appropriation of the supplies voted came to be deter- 

« Tallies of pro are mentioned for the last time in the public accounts 
for 1729 (Ret. on Public Income, etc., I, p. 80). But the anticipations of 
the land and malt tax by exchequer bills and by "loans in anticipation of 
duties" continue to appear in these accounts until 1762. It is not clear 
whether this distinction rests on the difference between exchequer bills 
and tallies or on that between the land tax and other duties. 



114 



The English Banking System 

mined by Parliament, and the necessity of presenting 
accounts demanded careful organization in each depart- 
ment. So long as there had been no legal distinction or 
division made between the issues, each debt incurred by 
any department of Government was a debt on the whole 
Government, with which the department borrowing the 
money was only especially concerned in that the sum was 
repaid through it. But when a definite sum was appro- 
priated every year for each branch of expenditure which 
came under parliamentary control, as for instance for the 
army and navy, the issue of debentures and bills, which 
were essentially short date bills of exchange, became a 
method of using credit for which each department was 
responsible to its own creditors. This credit must not 
exceed the total amount voted to each department for the 
year, it must be covered by this amount. We have seen 
in reference to the act founding the South Sea Company 
that Parliament itself insisted on a strict classification of 
the expenditure. This was carried out to a still greater 
extent by the Ministry, so that at the end of the financial 
year there was generally a considerable sum outstanding 
in the form of such debts as were due to the employment of 
credit. The next Parliament had either to provide means 
for this repayment or to have it funded. These forms of 
debt did not disappear until a new method of using credit 
was provided, when the different public departments ceased 
to manage their money independently, and a connection 
was established between the financial system and the Bank. 
The funding of debt led to a distinction between ex- 
chequer bills and the other kinds of floating debts. The 
exchequer bills, as has been already explained, were based 



115 



National Monetary Commission 

upon a government debt to the Bank, and their funding 
consisted in a statement that this debt would not be repaid, 
so that they became a permanent interest-bearing debt 
to the Bank. The other unfunded debts were either 
transformed into additions to the capital stock of the 
companies, which result was brought about by means of 
a subscription, or into an independent interest-bearing 
debt. In the latter case the Government, either directly 
or through the intermediacy of the companies, allowed a 
fixed annuity in return for the payment of a certain sum 
in such unfunded bills. The development of the annuity 
debt was the basis of both forms of consolidation, since 
they created no independent type of government debt, 
but consisted merely in the transformation of one type 
into another." 

The annuity debts were either terminable or not. The 
limit was either the life of the annuity holder (of which 
form of annuity debt the tontine was a variation), or a 
date previously fixed. Hence were distinguished: lyife 
annuities, tontine annuities, terminable annuities, and 
permanent annuities. 

Mention has already been made of the first tontine and 
its reception. A second attempt was made in 1765. 
Navy, victualing, and transport bills were to be funded 
by means of a tontine. Six classes were made, each with 
a capital of £50,000, every £100 of which was entitled 

«The following account is based mainly upon the Return on Public 
Income and Expenditure and upon the information given in the different 
loan acts, in so far as these introduced entirely novel types of public debt. 
An analysis, based upon this Return, of the English national debt from 
1689 until the present time, is given by Leroy-Beaulieu, "Traite de la 
science de finances," Paris, 1877, Vol. II, Bk. II, ch. v. to viii. For the 
increase in amount see ch. XII. 

116 



The English Banking System 

to an interest of 3 per cent per annum. Within each class 
the payments due to those annuitants who died were 
divided amongst the survivors. This division into six 
classes according to the age of the annuitants was repeated 
in the last tontine in 1789. The annuities of the deceased 
members were divided amongst the survivors until each 
of these secured the sum of £1,000. The shares were 
£100 and were entitled to £4 3s. interest in the first (the 
youngest) class, and to £5 12s. in the sixth (the eldest) 
class. 

The life annuities, which became important in the 
nineteenth century in connection with the sinking fund, 
at first occiurred very rarely as an independent form of 
debt. Three such loans were raised in 1694, one in 1696, 
and one in 1704. The principle is the same in all cases. 
An interest at so much per cent was allowed on payment 
of a fixed sum, £100, which interest decreased from 14 to 
12 and to 10 per cent, according to whether the purchase 
was made for one, two or three lives. The rarity of this 
type of debt was due to the fact that the State had to 
devote a large sum to the payment of the yearly annuity, 
owing to the necessity of paying back the borrowed capital. 
This obligation to repay in the present was avoided in the 
case of the terminable and permanent annuities. 

Although the terminable annuities were arranged so as 
to repay the capital advanced, the repayment was under 
the control of the Government and was generally spread 
over so long a period that the burden was not unduly 
heavy. Loans in the form of terminable annuities and 
anticipations were the regular forms until 171 5. At this 
date ten such loans were raised by the sale of annuities 



117 



National Monetary Commission 

for 89, 94, 99, and, in one case only, for 32 years. The 
principle upon which this sale was based was that a lower 
or higher annuity was allowed for the payment of the 
same amount of capital, according to whether the annuity 
continued for a longer or shorter period of years, so that 
the capital itself was repaid through the annuities. 
They thus differed from the life annuities only in the one 
point, viz, that in the latter the duration of the payment 
was undetermined, whilst in the former it was decided in 
advance. The terms long annuities and short annuities 
were used according to whether the payments were spread 
over a long or short period. 

After 1 76 1 they became more frequent again, but in 
connection with permanent annuities and lotteries and 
not independently. 

The permanent annuities were by far the most impor- 
tant of the English public debts. The first which was 
created, with the exception of the bankers' debt, was the 
government debt to the three companies. In 171 5 the 
State for the first time made a similar arrangement with 
private creditors. By i Geo. I, c. 19 and 21, £1,079,000 
was raised by a subscription loan, and £5 per annum was 
to be allowed on every £100 until the capital had been 
repaid. In the permanent annuities the possible repay- 
ment of the capital was not ruled out, but it was not pro- 
vided for in borrowing the money, whereas in the other 
forms of debt account was taken in determining the 
annuities of the repayment of the capital involved. 
Various attempts were made in the course of the century 
to repay the capital debt incurred through the perma- 
nent annuities; an account of these attempts forms the 



118 



The English Banking" System 

history of the different funds (general, sinking, aggregate, 
consohdated, and new sinking fund). The proceeds of 
certain taxes were appropriated to the payment of the 
other annuities at their foundation. On this difference 
rests the distinction between redeemable and irredeem- 
able annuities, which are not new types of debt, but only 
distinct names given to the debt according to the nature 
of the public obhgation involved. In the case of the 
redeemable annuities the State owed the capital and a 
yearly interest, but was only bound to pay the latter; in 
the case of the irredeemable annuities the State owed a 
yearly interest for a certain time. To the former class 
belong the government debt to the companies and the 
permanent annuities; to the latter the life, tontine, and 
terminable annuities. 

The yearly payment of the permanent annuities, since 
the capital debt existed apart from them, corresponded to 
the interest on the capital lent to the Government; hence 
it was based on varying agreements, and might be changed 
even in regard to a particular loan transaction. The 
Government had the right to repay the capital though it 
was not obliged to do so. Hence it could always dis- 
solve its contract with a creditor who would not agree to a 
change of interest. Such a conversion of the yearly pay- 
ment was not so simple in the case of the irredeemable 
annuities, for here the consent of the creditor was indispen- 
sable. 

The determination of the rate of interest in the case of 
the permanent annuities naturally depended upon the 
state of pubhc credit. In the first of such loans the amount 
of the yearly interest to be paid was fixed at so much per 



119 



National Monetary Commission 

cent on the total capital paid in, and a proportional pay- 
ment was made on every £ioo. From the time of 
George II onward it was usual to fix the rate of interest 
equally low (3, 3 >^, or 4 per cent) whatever the state of the 
public credit. Hence " this interest was not paid on the 
actual capital of the creditor but was reckoned on a 
nominal capital allotted to him. Thus stocks were 
established, the first occasion being in 1747 by 20 Geo. II, 
c'. 3, viz, shares in a funded pubHc debt, which shares bore 
a fixed low rate of interest. When the Government 
wished to borrow a certain sum, for example, £4,000,000 
in 1747, it offered stocks which bore a certain fixed interest 
on every £100, in this case 4 per cent. Thus it was not 
the interest but the price of the stock which had to be 
agreed upon between the State and the lender. If the 
interest corresponded to the public credit, the stocks were 
bought at par; if the interest were too low, less was paid 
for stock of the nominal value of £100, i. e., the Govern- 
ment had to issue more stocks in order to secure the 
desired amount; in 1747, £4,400,000 had to be issued 
instead of £4,000,000, and consequently £176,000 had to 
be paid yearly as interest instead of £160,000, i. e., about 
4^ per cent. This type of loan made borrowing easier, 
since it opened the door to speculation, and although it 
was frequently abandoned later on, in order to avoid so 
large an increase in the national debt, it was always 
adopted again in times of bad credit, for example, at the 
time of the American war. 

I^otteries were a very frequent method of obtaining 
money. They fall into two classes : during the first period 

oCf. Wilson, "The National Budget," London, 1882, p. 25, et seq. 



120 



The English Banking System 

they served only as temporary means of raising money 
without bringing any profit to the State; during the sec- 
ond they were used as an extra source of revenue. The 
turning point is marked by 28 Geo. II, c. 15, by which 
£900,000 of 3 per cent stocks were issued in a lottery of 
100,000 tickets at £10, so that the Government made a 
profit of £100,000. The first of the ten lotteries which 
occurred during this period has already been mentioned. 
The remaining nine occurred between 1710 andiyiQ. In 
all cases the capital was to be repaid in thirty-two years. 
Only the two first, however, were arranged on the principle 
of drawing lots for annuities (8 Anne, c. 4, and 9 Anne, c. 6) . 
The five following were so arranged that the fortunate 
tickets did not carry with them a higher annuity but a 
capital sum which was added to that paid (£10 on £100). 
The total capital debt, as increased by the lottery, bore 
the same rate of interest and was paid back in course of 
time, so that those who did not win had a claim to the 
interest on the sum they had subscribed and to its repay- 
ment, while the winners had the interest on the sum sub- 
scribed and on that won, and a claim to the repayment of 
both. The two last lotteries (5 Geo. I, c. 3 and c. 9) 
differ in that the drawers of blanks lost all claim while 
the fortimate tickets carried with them proportionately 
higher winnings. Hence the price of tickets for these two 
lotteries was reduced to £3. In 1769, under Tord North, 
the prizes were for the first time paid in cash, and subse- 
quently, until 1824, the lottery served not only as an inde- 
pendent source of revenue, but as a method of anticipating 
the year's receipts. Lotteries were connected with the 
annuity loans at the time of the seven years' war and 



121 



National Moneatry Commission 

again during the American war, being used to facilitate the 
conversion, repayment, and borrowing of those loans. 
Those who agreed to the reduction of interest or to the 
repayment of the capital debt at less than the nominal 
value of the stock received premiums in the form of lot- 
tery tickets, the disproportionate gains on which were 
attractive, while their payment laid no serious burden on 
the Government. Thus by lo Geo. Ill, c. 46, two and 
one-half millions of 4 per cent annuities were converted into 
3 per cents, and by 14 Geo. Ill, c. 76, it was made possible 
to redeem a million of 3 per cent stock in such a way that 
only £88 was paid on every £100 share. The raising of 
loans in stocks was thus made less expensive : people either 
drew lots for the amount in stock or — and this was the 
method of procedure usual during the American war — ob- 
tained for a given sum of money a somewhat lower sum in 
stocks and a lottery ticket. This ticket, if successful, en- 
titled the possessor either to a prize in money or to an 
equivalent amount in stocks, or to an annuity. The annu- 
ity lasted either for life, or for ninety-nine years, or for a 
shorter time, and differed in amount accordingly. Stocks 
were issued in this way in almost every year between 1758 
and 1784. 

Toward the end of the eighteenth century a plan fre- 
quently adopted was to issue stocks in connection with 
separate annuities. In 1757, by 30 Geo. II, c. 19, £3,000,- 
000 of stock was issued, every £100 of which entitled the 
holder to a life annuity of £1 2s. 6d. In 1762, by 2 Geo. 
Ill, c. 10, £12,000,000 were issued in such a way that 
every £100 purchased £80 of 4 per cent stock, which was 
to be converted into 3 per cents in nineteen years, and 



122 



The English Banking System 

which was combined with an annuity of £i for ninety- 
eight years. During the concluding years of the century 
such compHcated devices were the usual methods of 
raising loans. 

3. THE CONNECTION BETWEEN THE COMPANIES AND THE MANAGEMENT 

OF THE PUBLIC DEBT. 

The connections possible between the three companies 
and a public debt of the character described were three- 
fold. They might become creditors of the State through 
the purchase of government bills, or by making loans to 
it direct; they might take over a government liability, 
making under certain conditions a debt to themselves out 
of a public debt already existing ; or they might undertake 
on commission to advance the subscriptions to a public 
loan, to pay the yearly interest owed by the Government 
or to repay the capital. It is this third proceeding which 
is generally meant when reference is made to the manage- 
ment of the English national debt by the Bank. But 
throughout the eighteenth and during a part of the 
ninteenth centuries this connection between a private 
company and the Government was not confined to the 
Bank; nor was the share taken by the companies in the 
management of the debt restricted to acting as inter- 
mediaries between other creditors and the States. The 
debts to the company itself were not to be distinguished 
from other debts, and the duties which it undertook — 
of dividing amongst the individual shareholders the sum 
paid by the State as interest on the total debt, or of 
increasing this total debt by a loan to the State — were 
the same as those undertaken in its administration of 



12- 



National M on et ar y Commission 

the other Government debts. External distinctions — 
such as, for example, the duty of presenting accounts with 
regard to its expenditure on the management of the debt — 
appeared only in the eighteenth century, and were never 
consistently maintained. Hence, in speaking of the 
administration of the English national debt by the com- 
panies, the debts to the companies themselves must not 
be excluded but must rather be regarded as the essential 
starting point upon which all further connections between 
the companies and the Government were based. It was 
stated in a report of the House of Lords of June 2, 1733, 
that nearly the whole debt of the Kingdom was incor- 
porated in the three great companies. At that time the 
Government owed over forty-two millions to the com- 
panies, of which twenty-nine millions was owing to the 
South Sea Company alone. The companies, in administer- 
ing their capital stock, thus administered nearly the whole 
of the national debt; and when in addition they acted 
as intermediaries between the Government and other 
creditors they were only performing a function which they 
had already performed for their own shareholders for a 
long time previously. 

Two questions must thus be discussed in a study of the 
relations of the companies to the system of public debt. 
Firstly, how did the company itself regard the public 
debt ? And here account must be taken both of the debt 
due to a loan from the company, and of that resulting 
from a transference to the company of debts belonging 
to other public creditors. Secondly, what share had the 
companies in the management of government debts to 
other creditors? 



12/L 



The English Banking System 

(a) The East India Company. — ^The least important part 
in this matter was played by the East India Company. 
With the exception of the sum of £3,200,000 at 5 per cent 
owed to it since 1703, it made only one loan to the State, 
namely, one milUon at 3 per cent in 1744, on the renewal 
of its charter by 17 Geo. II, c. 17. In 1755 the interest 
on the first debt was reduced to 3 per cent, and in 1793 (33 
Geo. Ill, c. 47) the whole debt of £4,200,000 was com- 
bined with the so-called 3 per cent reduced annuities 
payable by the Bank into a single ftmd under the adminis- 
tration of the Bank. The capital stock of the company 
had grown by this time to seven millions, through in- 
creased subscriptions, but its financial position had been 
uncertain since 1773, when it had been obHged for the first 
time to borrow from the Government. The conversion 
of that part of its capital which consisted of a public 
debt into a property in stocks which could be freely dis- 
posed of, permitted greater flexibility in its financial 
transactions. The history of this and of its other financial 
relations to the State (payments into the Exchequer, 
the raising of loans) do not concern us here. The East 
India Company is of comparatively small interest in a 
study of administration of the English public debt. 

ih) The South Sea Company. — A much more note- 
worthy part was played by the South Sea Company, 
which grew to such importance during the first ten years 
of its existence that the Bank of England sank into the 
background in comparison. 

In 1 7 14, that is, only three years after its foundation, 
a sum of £822,032, consisting of arrears of interest due to 
the company and a government unfunded debt, was incor- 



125 



National Monetary Commission 

porated b^^ a corresponding increase in the company's 
capital stock by i Geo. I, c. 21. The latter now amounted 
to ten millions, on which a yearly interest, reduced in 
1 7 16 to 5 per cent, was paid by the Government. In 
1 719 (5 G^o- I J c. 19) its capital was further increased. 
The proprietors of certain lottery annuities (created by 
8 Anne, c. 4) of thirty-two years' duration, were per- 
mitted to exchange these for the company's stock, £11 
I OS . being given in stock for every £ i annuity. £1,202,702 
were subscribed. Besides this the company advanced 
£544,142 in cash. Its capital and the government debt 
to it were thus increased to £11,746,844. A more im- 
portant project for consolidation and funding was brought 
forward in 1720, when it was determined to convert the 
various floating debts and the outstanding terminable 
and permanent annuities into a great fund of permanent 
annuities at 5 and 4 per cent. Both the Bank of England 
and the South Sea Company competed for the privilege 
of carrying out this scheme, which privilege the South 
Sea Company finally secured by its extravagant offers.^ 
The company obtained permission, by 6 Geo. I, c. 4, to 
carry out the consolidation by taking in through sub- 
scription or purchase from the creditors: i. The irre- 
deemable debt, consisting of £666,821 yearly in long 
annuities (96, 98, and 99 years) and £127,360 yearly in 
short annuities (thirty-two years, the remainder of the 
lottery annuities not subscribed in the previous year). 

«The South Sea Company possessed a powerful friend in Mr. Aislabie, 
who was then chancellor of the exchequer, and it is said that there was 
some thought of transferring to it the whole debt owed to the Bank. " SomiC 
Considerations on the National Debt," London, 1729, p. 71. Cf. with refer- 
ence to the whole plan of consolidation and its consequences, Anderson 
a. 1720. 

126 



The English Banking System 

The long annuities were capitalized at twenty years' pur- 
chase, the short lottery annuities, which had still twenty- 
three years to run, at fourteen years' purchase. 2. The 
redeemable debt, consisting of £11,779,660 at 5 per cent, 
and £4,776,821 at 4 per cent, at such prices as might be 
agreed upon between the company and the holders. For 
this purpose the company might borrow money on its 
bonds or on bills, make calls for money on its members, 
or increase its capital by the issue of fresh stock. The 
latter was allowed up to an amount corresponding to the 
combined prices of the long annuities, at twenty years' 
purchase, of the short annuities at fourteen years' pur- 
chase, plus a sum equal to the market value of the 4 and 5 
per cent redeemable debt. In return it undertook to pay 
the Government £4,156,306 for the cession of the redeem- 
able debt, and £2,978,599 for that of the irredeemable 
debt, or a total of over seven millions. 

The company had to buy out any creditor who did not 
wish to subscribe. The money for this purpose and for 
its payment to the Government it hoped to obtain through 
the sale of the stock, since it expected to make a profit by 
its transactions with the public creditors. For although 
the amount to which its capital might be increased was 
limited as explained above, there was no limit set on the 
price at which the stocks were to be sold. This consti- 
tuted the risk of the whole undertaking, for the tempta- 
tion to use every means to drive up the price of the stock 
proved too great. And in actual fact, for a large number 
of the subscriptions, the company raised the price of the 
£100 share to £1,000 in money or government debt. In 
spite of this exorbitant figure the greater part of the debt 



127 



National Monetary Commission 

was subscribed, and the capital of the company was 
increased to £7,802,200, for which the Government had 
to pay an annuity reckoned in part at 4 and in part at 5 
per cent, and amounting in all to £1,861,114. Only 
£2,560,790 of the total redeemable debt and £161,380 of 
the total irredeemable debt was not subscribed. These 
amounts the South Sea Company could only secure by 
purchase. The purchase was never made, for in the 
same year the company was thrown into such financial 
distress by the crisis which has since received the name 
of the ''South Sea Bubble," that the most vigorous efforts 
on the part of the Government were required to save it 
from complete ruin, and there could be no mention of any 
payment from the company to the State. 

The trade carried on by the South Sea Company proved 
no source of income, and hence it had nothing but the 
yearly interest from the Government and the profits on 
the sale and purchase of its stock, out of which to provide 
a dividend for the shareholders. In spite of this the 
directors announced on August 31,1 720, ''that 30 per cent 
in money should be the dividend for the half year which 
would be due at Christmas following." But not even the 
Christmas dividend was paid, for by November the stock 
had fallen between £600 and £800 and the "bubble" had 
burst. Parliament instituted proceedings against the 
company's directors, clerks, and bookkeepers. Mr. Ais- 
labie and the secretary of state, Mr. Craggs, who were 
found guilty of fraudulent relations with the company, 
lost their seats in Parliament , the property of all of them 
was confiscated and administered by trustees for the bene- 
fit of the creditors. Finally Walpole proposed energetic 



128 



The English Banking System 

measures to restore financial order. His project became 
law by 7 Geo. I, c. 5. It provided for the transfer of 
nine millions of the capital stock of the South Sea Com- 
pany to the Bank, and of a like sum to the East India 
Company, at a price to be arranged between the compa- 
nies. This proposal was not, however, carried out; and 
it was not until 1722 (8 Geo. I, c. 21) that the sale to the 
Bank of four millions in stocks was decided upon and 
actually accomplished. The Bank's stock was increased 
by this amount and an annuity of 5 per cent (4 per cent 
after 1727) on the increase was paid to it by the State. 

The reduced stock of the South Sea Company was sub- 
jected to further changes in 1722. By 9 Geo. I, c. 6, it 
was divided into two portions of £16,901,100 each; half 
only was retained as trading stock for the company, the 
other half was to be regarded as a government annuity- 
bearing debt held by the company. This debt continued 
to be administered by the South Sea Company, under the 
name old South Sea annuities, until its repayment. 

Both debts were diminished through redemptions by 
about two and one-fourth millions by 1733, when the 
whole outstanding debt to the company amounted to 
£29,302,200. By 6 Geo. II, c. 28, a further portion of the 
trading stock was added to the old South Sea annuities, 
so that the two now amounted to £14,641,100 and 
£15,651,200, respectively. Moreover, the trading stock 
was divided into four equal parts and three-fourths of it 
was converted into an unincumbered, negotiable anntdty 
stock. Hence, the company's capital sank to £3,662,776 
whilst the remaining £10,988,327 was converted into the 



68299** — I J 9 129 



National Monetary Commission 

new South Sea annuities which were placed upon the mar- 
ket under the management of the company. 

During the succeeding years £3,276,890 of the South 
Sea debt was paid off. In 1751 the debt was again in- 
creased by 24 Geo. II, c. 2, which allowed £2,100,000 to be 
borrowed not from but through the South Sea Company. 
The resulting 3 per cent annuities, 1751, so called, were 
administered by the company, and the total government 
debt thus administered was now made up as follows: 

£ 

Trading stock 3, 662, 780 

Old South Sea annuities 12, 404, 270 

New South Sea annuities 8, 958, 255 

3 per cent annuities, 1751 2, 100, 000 

Total 27, 125, 305 

Interest (3 per cent on all debts after 1757) 813, 760 

After this time there was a break in the transactions 
between the company and the State. No further loans 
were raised through the company. It existed as a corpora- 
tion until the middle of the nineteenth century, having no 
other function than to administer a portion of the national 
debt ; with regard to which it undertook the paying off of 
capital, the payment of dividends, and the transference 
of stock. The principle of incorporating the national 
debt was nowhere more strictly carried out than here. 
A corporation consisting of a governor, a subgovernor, a 
deputy governor, and 21 directors had no fiu^her reason 
for its existence than a joint ownership of a government 
debt, and no other function than to trade in this debt and 
to carry out the technical duties connected with the pay- 
ments. 



130 



The English Banking System 

The paying off of the South Sea debt proceeded but 
slowly during the eighteenth century. In 1797 the total 
was still as much as £21,182,285. A financial report of 
the House of Commons for July 19 of this year is in exist- 
ence, which shows clearly that there was still no distinct 
intention to transfer the entire management of the public 
debt to the Bank. The report remarks: 

" It may also deserve some consideration, at some future 
period, whether a further saving might not be procured 
for the Public, if the South Sea Company could, by the 
consent of the Proprietors, be dissolved, as happened in 
the recent instance of the Million Bank; in which case 
the management of that part of the Public Debt which 
consists in South Sea Annuities might be transferred to 
the Exchequer, or to the Bank of England, in the same 
manner as Parliament has recently transferred to the 
Bank the management of that part of the Public Debt 
which was previously under the management of the East 
India Company." 

" It may also become a question of great importance to 
the public interest, if the South Sea Company should 
prefer the continuance of its present corporate capacity, 
whether it may not be enabled, under its present Charter, 
to lessen the public burthens by taking under its manage- 
ment any future augmentations of the Public Debt, and 
transacting the necessary Transfers and Payments of Divi- 
dends, at a lower rate of allowance than the Bank of 
England may at any time be willing to accept." 

The development of closer relations between the Bank 
and the Government explains why no such transfer was 
ever made. 



131 



National Monetary Commission 

(c) The Bank of England. — Two factors must be dis- 
tinguished in describing the development in this case also ; 
the increase in the public debt to the Bank, and the 
increase in the public debt which was incurred through 
the Bank as intermediary. The former was never so 
great as in the case of the South Sea Company, while the 
latter was much more important. 

The original capital, which bore interest at 6 per cent, 
continued to receive yearly payment at this rate until the 
middle of the century, by which time it had been increased 
by other loans and consoHdations bearing interest at lower 
rates. The first funding of exchequer bills and their 
interest, the pecuHar character of which has already been 
pointed out, was authorized by 7 Anne, c. 7, but at the 
same rate of interest, which was then (17 10) the usual 
one. The national debt was thereby increased by 
£1,775,027. In 1 71 7 the rate of interest on this debt was 
lowered to that paid on the East India and South Sea 
debts, i. e., to 5 per cent. The same act (3 Geo. I, c. 8) 
authorized the funding of £2,000,000 in exchequer bills 
at a like rate of interest. Two years later the debt to the 
Bank was further increased by the purchase already 
referred to of four millions of South Sea stock, which 
after 1727 bore interest at 4 per cent only. At the same 
date the annuities on the debt due to the consoHdation 
of the exchequer bills were reduced to the same rate. 
In 1728 and 1729 (i Geo. II, c. 8, and 2 Geo. II, c. 3) 
three millions (altogether) at 4 per cent were added, 
while at the same time the whole of the debt funded in 
1 7 10 and half a million of that funded in 171 7 was repaid. 
Another million of the latter was canceled in 1738. The 



13a 



The English Banking System 

total 4 per cent debt thus amounted to £7,500,000. In 
1742 (15 Geo. II, c. 13) the Bank undertook to advance 
£1,600,000 without interest, if the annuity paid on its 
original capital remained untouched, which annuity was 
equivalent to an interest of 3 per cent on the total of 
£3,200,000. In 1746 (19 Geo. II, c. 6) exchequer bills 
to the amount of £986,800 were funded at 4 per cent. 
In 1750 (23 Geo. II, c. i) the interest on the whole debt 
was reduced to 3>^ per cent, with the proviso that after 
December 25, 1757, it was to be only 3 per cent. 

The following table gives the debt to the Bank in a 
way similar to that given above for the debt of the South 
Sea Company: 

1 . Original capital : £ 

Government debt in 1694 i, 200, 000 

Government debt in 1 708 400, 000 

Government debt in 1742 i, 600, 000 

2. Transference of part of the government debt owed to the 

South Sea Company 4, 000, 000 

3. Other loans: 

1717. Consolidation of remaining exchequer bills 500, 000 

1727 I, 750, 000 

1728 I, 250, 000 

1746. Consolidation of exchequer bills 986, 800 

Total II, 686, 800 

Interest (3 per cent on all debts after 1757) 350, 604 

The government debt to the Bank during this period 
was thus not equal to half the debt administered by the 
South Sea Company. It remained unaltered until the sec- 
ond decade of the nineteenth century. During the whole of 
the second half of the eighteenth century there was no 
increase in the national debt through loans from the com- 
panies. As we have already noted, lotteries joined to 
annuities, and various combinations of annuity loans, were 



T33 



National Monetary Commission 

then more in favor. The share which the Bank had so far 
taken in the management of such loans dated from 1710, 
when for the first time it received the subscriptions for a 
lottery loan of one and one-half millions. Considering the 
existence of a special ''lottery annuity" department in 
the Exchequer, it is more than doubtful if it also undertook 
the payment of the annuities connected with the loan. 
It did, however, receive the subscriptions for the lotteries 
in the two following years 171 1 and 171 2. Whether or no 
it had to pay the tickets and interest connected with these 
loans, it was at any rate not long concerned in this business, 
for in 1720 nearly all the lottery annuities were converted 
into South Sea stock. 

The Bank was again entrusted with the raising of an 
annuity loan in 17 14. i Geo. i, c. 19 and 20, authorized 
the raising of £910,000 and of £169,000, on which an inter- 
est of 5 per cent was promised. The Bank kept the books 
for the subscriptions, received the money, and sent it to 
the Exchequer. This share in the work of receiving sub- 
scriptions was undertaken in comparatively early times 
and continued for all subsequent loans. On the other 
hand, the payment of annuities through the Bank was a 
policy not continuously adhered to. That this method 
was adopted in 1 714 is shown by the yearly payment made 
to the Bank for its administration. The same arrange- 
ment was made in 1726 for a loan of a million administered 
by the Bank (12 Geo. II, c. 2), and again in 1731 for a sum 
of £800,000 (4 Geo. II, c. 9), and after this frequently 
until the middle of the century, although the payment 
of annuities through the Exchequer was not altogether 
discontinued. 



134 



The English Banking System 

A different policy was initiated in 1751. This year 
marks an epoch in the history of the BngHsh public debt. 
The debts to the South Sea Company and to the Bank were 
definitely set in order for a long time to come and the same 
thing was done for the other debts not connected with 
the companies. By 25 Geo. II, c. 27, various 3 per cent 
annual charges, payable some through the Bank and 
some through the Exchequer, which amounted in all to 
£9,137,821, were united in a single fund, the management 
of which was entrusted to the Bank. The interest on these 
" 3 per cent Consolidated Annuities " was paid by the Bank 
half-yearly, on the 5th of January and the 5th of July. 

In addition various 4 per cent annuities were converted 
into 2)% per cents, with the proviso that half of them 
should be reduced to 3 per cent in 1756, and the other half 
in 1758. After buying out the creditors who would not 
agree to this reduction the annuities of the remaining credi- 
tors were united into a fund of £17,701,323 under the 
name ''3 per cent Reduced Annuities." This fund also 
was administered by the Bank, which paid the interest on 
the 5th of April and the loth of October in each year. 

Besides the above-mentioned stocks, there were still 
the so-called bank annuities on the loan of a million in 
1726, and £400,000 of 3>^ per cent annuities which were 
redeemed in 1752. The total public debt administered 
by the Bank was thus composed as follows: 

£ 

Three per cent consolidated annuities 9, 137, 821 

Three per cent reduced annuities 17, 701, 323 

Three per cent bank annuities i , 000, 000 

'I'otal 27, 839, 144 

Interest (3 per cent after 1757) 835, 174 



135 



National Monetary Commission 

To the above debts must be added the exchequer 
annuities, annual payments for hf e or for a term of years 
payable at the Exchequer, which had not been subscribed 
to form any of the preceding stocks, and which could not 
be redeemed without the consent of the holders. These 
amounted to a yearly sum of £208,906. With this 
exception the administration of the entire public debt 
was practically in the hands of the companies. The 
Bank of England took the most important share, exceed- 
ing that of the South Sea Company by a sum of twelve 
millions. The rate of interest on the whole of the debt 
was reduced to 3 per cent. 

This is not a history of the English public debt, but 
merely a study of the growth of its connection with the 
banking system, hence the abundant material available 
for the history of the debt during the second half of the 
eighteenth century need not be further examined. 

The principle that the administration should be deputed 
was established by the middle of the century. The policy 
became definite, not by any further development of the 
principle, but by its constant application when fresh 
debts were contracted. No fresh light would be thrown 
on the subject by following out in detail the numerous 
payments, new loans, consolidations, and increases and 
reductions of interest. It is, however, worth while to 
trace the increase in the total public debt, since this marks 
the growing importance of the Bank and the declining 
influence of the South Sea Company. Repayments alone 
were made to the latter, while the Bank was continually 
entrusted with new loans, and the total public debt ad- 



136 



The English Banking System 

ministered by it as intermediary amounted in 1800 to 
£393,114,680. After 1751 the fresh debt was generally 
added to one of the two existing funds, and increased 
either the 3 per cent reduced annuities, which had risen 
to £56,850,983 in 1800, or the 3 per cent consolidated 
annuities, which in the same year amounted to no less 
than £244,983,444. Besides these there were 4 and 5 
per cent annuities, forming separate funds and amounting 
to £44,762,860 and £48,250,426, respectively. The mil- 
lion of bank annuities and the so-called 3 per cent imperial 
annuities (loan to the German Euiperor) , which amounted 
to £7,266,967, made up the remainder of the permanent 
annuities administered by the Bank. After 1761 it had 
also the charge of terminable annuities, which, in' 1806, 
involved a yearly interest of £1,665,739. I^ comparison 
with these important items of the debt, the exchequer 
annuities, which only required a yearly payment of 
£131,980, sank into insignificance. 

These statistics of the development of the ' national 
debt show the importance of the duty undertaken by the 
companies in administering the debt. Hence arises the 
question of what this administration consisted, and what 
payment was made by the State for it. 

4. THE DUTIES INVOLVED IN THE MANAGEMENT OF THE DEBT AND THE 
INDEMNITY PAID BY THE STATE. 

The position of the companies varied according to 
whether the Government borrowed directly from them or 
only used them as intermediaries. In the first case they 
either increased their capital stock by the amount of the 
loan, i. e., they issued stocks, or the debt simply became 



137 



National Monetary Commission 

the property of the company, and was entered in their 
accounts among the outstanding assets. The interest on 
the loan was then reckoned as part of the income of the 
company, and, with the rest of the income, was divided 
among the shareholders as dividend. When the govern- 
ment debt led to the issue of stock, the interest paid was 
still reckoned as part of the income to be divided among 
the shareholders, but the price at which the stock was 
issued gave opportunity for profit. Hence for the indi- 
vidual the amount of the annuity paid by the State was 
not fixed, for this was paid in a lump sum to the company, 
and he only received a share in it because he was a mem- 
ber of the company. The market price of that part of 
the company's stock which owed its creation to a public 
loan was thus only indirectly determined by the state of 
public credit; it was also influenced by the other business 
relations of the company. The administration of these 
stocks was, however, subject to the usual business forms — 
registration of the names and capital of the holder in the 
books, transference at will, close of the books before the 
time for the payment of dividends, fluctuations in the divi- 
dends corresponding to fluctuations in business transac- 
tions, etc. 

In the second case, when the loan was raised through 
the companies as intermediaries, the companies had no 
important influence; they could fix neither the amount of 
the subscription, nor that of the dividend. The latter 
was determined by the Government once for all, the 
former, in cases where it was variable, depended on the 
offers that were made. In the last resort, however, the 



138 



The English Banking System 

State, i. e., the Treasury, had to decide this. The pro- 
cedure carried out by the companies in these cases was 
as follows : In the act of Parliament which authorized 
the loans it was provided that the cashiers of the company 
should receive subscriptions. They were instructed to 
pay the sum received into the Exchequer and to give an 
account of the same. The claims of the individual holders 
to shares in these loans were made negotiable at the ofhce 
of the company and the money required for annuities or 
other payments was advanced to the head cashier from 
the receipt side of the Exchequer by way of imprest, and 
upon account. The books which related to the govern- 
ment stocks, and which were kept by the company, were 
managed exactly on the same principle as the company's 
own books. The account of the holder was credited with 
his share and debited with the sums withdrawn through 
transfers, redemptions, etc. The payment of dividends 
was managed as follows: At the date of paym^ent a sum 
equal to half the annuity due on the shares payable through 
the company, was paid by the Exchequer to the company. 
The latter had now to make the payments to the different 
shareholders. Accordingly the books used for the regis- 
tration of transfer were closed, the shares of each person 
were copied from them and written on a sheet of paper 
opposite the name of the holder. A dividend warrant 
was filled up for each holder, giving his name, his share 
in the capital, and the dividend due thereon. A dividend 
book was then made up in duplicate containing in alpha- 
betical order the names of the holders and the other data. 
All these statements were verified by the ofiicials at the 
Bank, and the warrants, if found correct, were signed by 



139 



National Monetary Commission 

one of them. The holders demanding the dividend wrote 
their names in the dividend book and signed the warrant, 
which latter signature was certified by an official. The 
warrants were then payable at the office. The warrants 
paid were entered in a cash and audit book and their 
amount was compared with that of the unpaid ones of 
which a list was made out of the dividend books. The 
total must equal the total annuity pay able.'' 

The duty of presenting accounts on the receipt of the 
loans and the payment of the dividends existed until the 
end of the century, and alterations were made only in con- 
sequence of the Report of the Committee of 1780 on Pub- 
lic Accounts. Until that time all the accounts were pre- 
sented to the auditor of imprest, who had to audit them. 
The fees for this audit amounted to £20,000, an unneces- 
sary expense, since the payments were sufficiently con- 
trolled in other ways. The subscriptions to a loan were 
handed over to the Exchequer, where receipts were given 
for them and in whose accounts they appeared. The pay- 
ment of capital and of the dividends was checked by the 
owners themselves, who could take legal means to enforce 
payment from the company should it refuse the same. 
Moreover, the presentation of accounts was not consist- 
ently enforced. The Bank had to send in accounts of all 
the money transferred to it from the Exchequer, as well as 
of the annuities due on its capital stock; the South Sea 
Company need only present them for the annuities of 1751, 
the East India Company not at all. But, according to the 

o An account of the duties performed by the companies in their admin- 
istration of the public debt is given in the nth Report of the Committee 
on Public Accounts, 1780. 



140 



The English Banking System 

proposal made by the committee of 1780, the matter was 
so regulated that the companies presented no accounts on 
the disposal of the annuities on their trading stock, but 
only sent in a general account to the Treasury of all the 
government annuities paid through them, which account 
contained a statement of their receipts and payments in 
this connection and of the remainder of the dividends and 
shares still unpaid. 

In theory the duties connected with the management of 
the public debt were simple enough, but the resulting ex- 
penditure of money and time by the companies was so con- 
siderable as to entitle them to an indemnity. It was not, 
however, till a century had passed that this was accepted 
as a definite principle. At first such payment was con- 
nected with the incurment of special expenses by the com- 
pany for buildings, officials, servants, printing, etc. Thus 
as early as 1694 the Bank received £4,000 ''toward the 
expenses of the House, " and in 1712 the South Sea Com- 
pany received £8,000 for the same purpose. The Bast 
India Company, on the other hand, was paid no indemnity 
of this kind until 1751, when it received £1,687, while at 
the same time its annuity was reduced from 4 to 3 per 
cent. A comparison between this ''allowance for man- 
agement " and the principal debt shows that there was no 
fixed proportion between the two. Each increase of the 
debt was accompanied by an increase of the allowance, 
voluntarily agreed upon, while a corresponding decrease 
followed any redemption of the debt. These alterations 
were not always stated in the acts themselves, the deter- 
mination of their amount being left to the Treasiu-y; as, 
for example, in the case of the East India Company when 



141 



National Monetary Commission 

the debt to it was transferred to the administration of the 
Bank, and so on. 

In any case the compensation paid for the raising 
of a loan and for its administration rested on no sys- 
tematic basis. It varied according to whether it was 
a question of raising an annuity or lottery loan or of 
the administration of annuities. For the receipt of 
subscriptions an indemnity was paid at first only to 
individual officials of the company, who were specially 
indicated (cashiers and bookkeepers). This was not 
determined by law, but was settled by the Treasury. 
Thus the chief cashier received £600 for the two loans 
raised by the Bank in 1714. From 1719 onward the 
amount was, with few exceptions, £805 los. lod. per 
million. For lottery loans it varied from £1,000 to 
£2,000. The annual indemnity for the administration 
of the annuities was also originally paid to the head 
cashier and the head bookkeeper. Thus the former 
received £650 and the latter £600 for the two annuities 
in 1 714. For the million in 1726 a yearly sum of only 
£360 was paid, and that directly to the Bank ("for 
the use of the Governor and Company of the Bank of 
England")- In 1742 a yearly sum was again granted 
to the cashier and bookkeeper, and the Bank received 
nothing. The annual payment after the date of the 
consolidation in 1751 was, however, made to the Bank, 
and amoimted to £562 los. per million. Since this was 
reckoned according to the amount of the capital and not 
of the annuity, the terminable annuities were capitalized 
at twenty-five years' purchase and the yearly payment 
calculated on the resulting amount. 



142 



The English Banking System 

The allowance to the South Sea Company was £21,397 
after the great consolidation in 1720, and £1,181 for 
the annuities of 1751, i. e., £562 los. per million. This 
decreased in proportion as the debt was repaid. 

The chief commissioners of audit made representa- 
tions to the Treasury in 178 1 with regard to the indemnity 
paid to the Bank, and proposed the establishment of 
an independent office for the administration of the debt, 
by which proceeding the expenses would be decreased 
by two-thirds. As a result of this an agreement was 
made between the Bank and the Treasury which was 
embodied in a treasury minute (legally confirmed by 31 
Geo. Ill, c. 33). This fixed the sum for charges of man- 
agement of all public debts administered by the Bank 
at £450 per million. Only two payments were excepted 
from this, the £4,000 which had been paid for the capital 
stock since 1694, and £1,898 3s. 4d. which had been 
paid since 1722 for the stock purchased from the South 
Sea Company. The payments for receiving the sub- 
scriptions to the loans continued at the rate of £805 
los. lod. per million for annuities and £1,000 for lot- 
teries. The South Sea Company received its annual 
payment undisturbed at the rates hitherto paid. 

II. THE ADMINISTRATION OF PUBLIC MONEY AND THE 
bank's share therein. 

The preceding accoimt shows that the assumption of the 
management of the public debt by the Bank, the East 
India Company and the South Sea Company, respectively, 
was directly connected with the raising of government 
loans by these companies. There was no such point of 



143 



National Monetary Commission 

departure for the transference to the Bank of the work 
done by the pay offices. Owing to the pecuhar way in 
which the debt was managed, the former change involved 
no alteration of the government offices. But the com- 
plete transference of the management of public money to 
the Bank necessitated a reform of the entire financial 
administration. The system of public payments forms 
part of a complicated process, in which three principal 
factors can be distinguished, (i) The collection of the 
public revenues and their distribution to meet the various 
public liabilities; this we shall call the transfer of funds. 
This process is controlled (2) by the power of disposing of 
the public revenue — the right of assignment. Finally (3) 
the system of public accoimts and audit is concerned with 
every alteration in the public assets, whether through 
receipts or issues, in order to secure an economical admin- 
istration of the finances and to prevent loss. The regular 
performance of these three functions is the duty of a 
special group of government departments. The transfer 
of funds goes on within the system of pay offices ; the right 
of assignment is exercised by the administrative offices, 
and other independent offices are occupied with the presen- 
tation and audit of accounts. If a bank is to enter this 
group of coordinated authorities, it is clear, first of all, 
that there is only one of them, namely, the pay offices for 
the transfer of funds, whose duties it can undertake. The 
machinery of banking is imquestionably as well adapted 
to carry out the transfer of fimds as are pay offices. But 
the extent to which the Bank can imdertake this duty and 
the problem of organizing it to carry out its share of the 
work depend largely on the system of pay offices which it 



144 



The English Banking System 

replaces and on the principles according to which the 
transfer of funds is conducted. Both these matters, how- 
ever, influence the development of the right of assign- 
ment and the system of audit. Theoretically these latter 
are not affected by the decision to employ a bank for trans- 
fers of public money, but in practice their form is dependent 
thereon. The alteration in the system of pay offices was 
combined in England in actual fact with a change in the 
extent and exercise of the right of assignment, at least as 
regards the persons ultimately responsible for the manage- 
ment of public finance, and in the system of public accoimts 
and audit. In many cases the changes were only parallel 
reforms, but they were constantly connected, owing to the 
unity which always characterizes the administration of the 
public money. 

We must consequently show, at least in the essential 
stages, how the principle of administration of public 
money by the Bank was introduced side by side with 
reforms in the associated departments of the financial 
administration. These occurred chiefly in the nineteenth 
century. Until nearly the end of the eighteenth century 
the financial administration remained unchanged, so far as 
concerned the organization of public money, of accounts, 
and of audit. We need here, therefore, only consider the 
state of things which has arisen in the course of the nine- 
teenth century. 

(j) The central financial authorities. — The Treasury and 

the Exchequer. 

As early as the twelfth century England possessed a 
strongly organized central authority for the whole admin- 
istration, instituted with the establishment of the Norman 

68299° — II 10 145 



N ation al Monetary Commission 

feudal State."^ The most important fimction exercised 
by this authority was the administration of finance. The 
receipts and issues were regulated by it, the former being 
concentrated in the pubhc Exchequer, into which they 
were paid by the collectors ; the accounts of those who had 
accounts to render were audited; financial disputes were 
adjusted. In the course of time the other branches of the 
administration were separated off, and the administration 
of the central finance alone remained and was carried on 
under the name of the ancient authority, the Exchequer. 
And this office, too, was split up, though much later, into a 
court of justice and departments of administration and of 
cash and audit. The Court of Exchequer was fully organ- 
ized imder the Tudors and after this time had only a formal 
connection with the financial administration. Adminis- 
trative business left the Exchequer in the sixteenth cen- 
tury. Only the management of Crown property, which 
had been connected with the Exchequer from early times 
remained under its control. On the other hand, the 
authorities which were constituted to administer new 
branches of revenue were no longer included in the Ex^ 
chequer. A clear distinction between the management 
of the receipts and expenditure, and the audit of accounts, 
was not made imtil the eighteenth and nineteenth cen- 
turies, when the enormous increase in expenditure necessi- 
tated methodical procedure, and the development of par- 
liamentary control imposed responsibility. 

« Described by Gneist, "Kngl. Verwaltungsrecht," 1867, 1, § 193; Reinhold 
Pauli, "Geschichte von England," 1853, Bk, II, § 136; both are based upon 
Madox "The History of the Exchequer," London, 1769 (2d edition); 
Thomas, "The Ancient Exchequer of England," London, 1845, from which 
the following account is also taken. 



146 



The English Banking System 

The original directors of this central authority were 
the treasurer, for all receipts and expenditure, and the 
chancellor, or ''chancellor of the exchequer," as he was 
called to distinguish him from the lord chancellor, for 
accounts and audit. These officers may be regarded as 
corresponding to the Handler and Gegenhdndler of the 
German treasiu-ies in the middle ages. But owing to 
the position of the Exchequer and its connection with 
all other public business their importance far exceeded 
that of mere revenue officials. Hence as public business 
increased in extent they abandoned their close connec- 
tion with the Exchequer, retaining only the ultimate con- 
trol of finance as part of the administrative system which 
had passed into their hands. It is said that under Lord 
Burleigh, in the time of Elizabeth, the treasurer no longer 
appeared in person at the Exchequer, to manage the busi- 
ness there, but that his orders were sent in writing. We 
must regard this as the period when an independent 
office, the Treasury, developed alongside of the Exchequer 
for the management and conduct of the finance, while 
the Exchequer itself continued to be the head office for 
payments, accounts, and audit. The chancellor of the 
exchequer was originally, so long as both were connected 
with the Exchequer, an ofiicer appointed to check the 
treasiurer; but as early as 1434 he was designated "vice" 
or ''under treasurer." He also, therefore, was trans- 
ferred to the business of financial administration. Thus 
in the sixteenth century the Treasiury appears as a minis- 
try of finance, in contrast with the Exchequer, which was 
now a subordinate department for the management of 
public money and accounts. Only one idea is continu- 



147 



National Monetary Commission 

ously connected with the Exchequer, viz, that the assign- 
ments of the Treasury shall be checked there. The Ex- 
chequer is subordinate to the Treasury in regard to the 
appointment of its officials and the organization of its 
activities, but in one matter the two are on an equality. 
Disputes between them are referred only to the court of 
exchequer. On this single point depends at a later date 
the whole of the reorganization of the system of control. 

In the Exchequer itself the business connected with the 
public accounts was carried on in two departments — the 
receipt side and the account side of the Exchequer. 

The receipt side was the central public Treasury. Its 
duties were the receipt, the custody, and the issue of the 
public revenue. All receivers and collectors must peri- 
odically send their superfluous cash there, and thence, 
on the authority of a royal warrant or treasury order, 
the public money was transferred to the paymasters or 
actually paid out direct. Periodic accounts of the receipts 
and issues of public money were compiled there and 
communicated to the Treasury, so that the management 
of the revenue might be examined. The officers of the 
Exchequer were: 

(i) The auditor of the receipt. This officer had re- 
placed the treasurer, and his duties were ''to keep the 
keys of the King's Treasury, which belong to the Treas- 
urer in his stead, and to enroll the Receipts and Issues 
made in the Receipt, and to write the Tallies.*^ Thus in 
his department the warrants for payment were registered, 
the cashbooks were kept, and the accounts of the treas- 
urer were compiled. 

a Thomas, loc, cit., p. 129. 
148 



The English Banking Sy stem 

(2) The clerk of the pells. This officer kept the books 
and acted as a check on the auditor. All business con- 
nected with the public money (assignment, receipt, and 
issue) was recorded by him. 

(3) The tellers, the actual cashiers. 

(4) The chamberlains, who had to supply the tallies 
used as receipts. 

The persons hitherto named were the chief officers on 
the receipt side." There was naturally, as time went on, 
an increase in the number of officers, but this of itself 
did not affect their position. A rise in the status of an 
officer may, on the one hand, be due to an increase in his 
duties or, on the other, to the fact that the head officer 
has acquired the right to appoint a deputy. Bach of the 
above-named officers had a deputy at the end of the 
seventeenth century and perhaps even earlier. The 
actual duties of the office were transferred to the deputy. 
The office of treasurer itself arose in ancient times in such 
a manner. But no new functions were given to the indi- 
viduals who thus freed themselves from their official 
duties. Their posts consequently became sinecures. 

a A more complicated organization grew up toward the end of the 
seventeenth and beginning of the eighteenth centuries owing to the devel- 
opment of the system of pubUc debt. Thus in 1704 we find an exchequer 
bills office with a head and under officers, an annuity office with two 
departments — the bookkeeping office (three officials) and the pay office 
(five officials) — a malt and a milHon-lottery office, the former with four, the 
latter with three officials. These offices were created for certain special 
purposes and were really special pay offices. But they formed part of the 
receipt side of the Exchequer, i. e., a part of the pubHc central treasury. 
They were not permanent. The exchequer bills and the annuity offices 
alone survived until the nineteenth century. These offices were origi- 
nally intended to manage the whole of the exchequer bills and the annuity 
loans, but their duties were limited by the intervention of the Bank to, in 
the first case, the preparation of and payment of interest on the bills and, 
in the second case, to the management of certain annuities. 

149 



N ational Monetary Commission 

The examination into the expenditure of the pubHc 
revenue was made on the account side of the Exchequer. 
The procedure, aheady described by Gneist, here took on 
a semi-judicial form, since the barons assembled as the 
court of the exchequer decided disputes on points of law 
which had arisen in the course of the financial adminis- 
tration, and swore in the ojHicials who had to present 
accounts and must affirm them on oath. The charging 
and discharging of these public accountants and the exam- 
ination of their accounts were the duty of a whole succes- 
sion of officials representing the various audit authorities, 
before the matter came before the barons and was judi- 
cially decided. The system of accounting was, until the 
nineteenth centiury, extraordinarily complicated, and 
involved so many subordinate offices and special forms of 
presenting accounts that an examination thereof would be 
beyond the scope of this book. One distinction must, 
however, be noted here, since it has become important in 
connection with the further development of methods of 
audit. 

In very early times the clerk of the pipe and the con- 
troller of the pipe, who assisted him and also supervised 
him, were the only officials who exercised a control over 
the expenditure. The former kept the great roll of the 
pipe in which the different accountants were charged with 
the sums debited to them, and after the presentation of 
their accounts were discharged. This discharge, by enter- 
ing the quietus est in the pipe roll, could only take place 
with the controller's consent. These two persons were 
thus the only controlling officials and their competence 
comprised the accounts of the entire country, as is shown 



ISO 



The English Banking System 

by the division of the pipe roll. But as early as the thir- 
teenth century the foreign roll appears alongside of the 
pipe roll. This roll obtained its name from the fact that 
in it only such entries were made as had not been already 
by custom assigned to the pipe roll. Thus in it were 
registered the accounts arising out of the collections and 
applications of the annual supplies voted by Parliament. 
It was kept by officials called "auditors." In 1547 
another division was made amongst these officials, the 
audit of the accounts arising out of the administration of 
the crown lands being assigned to special auditors of the 
land revenue, while the auditors of the foreign roll were 
called ''Auditors of Prests and Foreign Accounts," and 
later, "Auditors of Imprest." All these different offices, 
which were not subdivisions of a single head office but 
were independent audit authorities, continued to exist 
side by side in the eighteenth centm-y. The auditors of 
imprest, however, became the most important, owing to 
the increase in the parliamentary grants whose applica- 
tion they had to control. This brought them into con- 
tact with Parliament itself, and when the organization 
of the system of audit was taken in hand, attention was 
first directed to them. 

It can not be shown that there was, properly speaking, 
any dependence of the one side of the Exchequer on the 
other. But there was necessarily a close connection. 
The half yearly statement of accounts made by the audi- 
tors of the receipt formed the basis on which the entire 
audit and control of the account side was founded. The 
receipt side charged the accountants, the account side 
checked their discharge. The receipt side had to prepare 



151 



N ation al M onetary Commission 

the wooden tallies used as quittances. When such a tally 
was used as a receipt for money paid, it was divided into 
two parts. The one, the foil, was given out; the other, 
the counterfoil, was retained. The collector in presenting 
his accounts sent in the foils as vouchers. The foils, if 
correct, must agree with the counterfoils. On each 
return made by the collectors, the chamberlains noted 
whether the foils belonging thereto were in order; then 
the retiurn was sent to the clerk of the pipe or to an audi- 
tor. The close connection, formed by daily business rela- 
tions, between the receipt side and the account side of the 
Exchequer, must necessarily have caused any alteration 
on the one side to be felt on the other. 

(2) The position of the receipt offices and the Exchequer. 

Until the seventeenth century the collection of the pub- 
lic revenue was managed by local administrative offices, 
such as, for instance, the self-governing bodies, the sheriffs, 
ministers, and receivers, and the commissioners appointed 
on one occasion or another, who were directly subordinate 
to the Treasury and in direct connection with the Excheq- 
uer.® As, however, the system of taxation developed 
dtuing the seventeenth and eighteenth centuries, the 
formation of head revenue offices proceeded also, which 
offices were indeed under the Treasury, but could act 
independently within the limits set by acts of Parliament 
and regulations. The Treasury remained as before the 
head of the financial administration, but the duties were 
discharged by these head offices. They developed as a 
rule in proportion as the taxes when once imposed were 

^Cf. Gneist, loc. cit., Bk. I, p. 326 et seq., p. 617; Bk. II, p. 781. 

152 



The English Banking System 

made perpetual, as the public expenses which were sep- 
arately appropriated to separate heads of the revenue 
increased, and as the complexity of the forms of taxation 
demanded administration and no longer mere collection. 

Thus in 1661 a board of commissioners was created to 
administer the customs, and these for the first time came 
entirely under the management of the State. ^ In a similar 
manner by 12 Chas. II, c. 35, the postal administration 
was reorganized and this culminated in the foundation of a 
general post office in London. In the same year the taxes 
associated together under the general name "excise," 
which had hitherto been only temporary, were now by 
12 Chas. II, c. 23 and 24, voted for the lifetime of the 
King, and he was allowed to erect a head office in London 
for the better administration, collection, and custody of 
the receipts. Among the taxes afterwards administered 
by this office was the salt tax, imposed in 1694, the man- 
agement of which was separated off in 1 702 and intrusted 
to its own office, but in 1798 was again united with the 
excise. ^ 

The taxes imposed in William Ill's reign — stamp tax, 
license for hackney coaches, house duty, tax on hawkers 
and peddlers — ^were each administered by a separate head 
office.^ The land and malt tax occupied a peculiar posi- 

« "The History of Taxes from William the Conqueror to the Year 1761." 
In ancient times the farming out of the customs was usual, A definite 
organization of the customs administration was not made until the century 
above referred to, by 12 Chas. II, c. 4. 

& The salt tax was imposed by 5 and 6 Will, and Mary, c. 7. Its admin- 
istration was separated from that of the excise by i Anne, c. 7, and was 
again united to it by 38 Geo. Ill, c. 88. 

c The stamp tax was imposed by 5 and 6 Will, and Mary, c. 21, the tax 
on hackney coaches by c. 22 of the same year, that on hawkers and peddlers, 
etc., by 8 and 9 Will. Ill, c. 25. 



m 



National Monetary Commission 

tion throughout the centtiry, being collected, in accordance 
with the annual vote, by receivers general for the different 
counties, who were appointed in each year by act of Parlia- 
ment. This branch of the revenue, which later formed a 
basis for the income tax, was permanently organized only 
in 1797. '^ 

The receivers general — the chief receiving officers in the 
different coimties, under whom head collectors and col- 
lectors managed the local revenue service — were subordi- 
nated to the head offices. The local divisions of the 
revenue offices were naturally not alike for all branches of 
the revenue, but were formed according to the importance 
of the different sources of supply. 

After the erection of special head offices for the admin- 
istration of the different branches of the revenue, the 
receipts for the latter were accumulated first in their 
respective offices, and thence delivered to the Exchequer. 
In so far as the duties were paid in London itself, the head 
office served both as a receiving office for the local revenue 
and as an accumulating office which was in direct con- 
nection with the receivers general, who, in their turn, 
through the head collectors and collectors, accumulated 
the revenue collected in each coimty.* The interval of 
time allowed to the actual collectors in which to send 
their money to the receivers and to the latter in which 
to send it to the head office, as also the fees paid to the 

a By 37 Geo. Ill, c. 35. 

& The payment of the land tax and excise duties seems to have been the 
only exception to this clumsy method. In their case the act imposing the 
taxes provided that payment should be made to the Exchequer through the 
receivers. These direct payments ceased again however when it became 
common to use bills of exchange which could only be cashed at the head 
office. 



154 



The English Banking System 

different offices, was usually specified in the act ordering 
the collection of the revenue. To see that these regula- 
tions were carried out was the duty of the head offices 
and ultimately of the Treasury as controlling the entire 
financial administration. 

The provisions with regard to the head offices which 
were made in the original laws establishing them, con- 
tinued in force throughout the eighteenth century as is 
shown by the facts brought to light by the commission 
of inquiry in 1780.^ The receivers general of the land 
tax and of the direct taxes, which were collected at the 
same time, must send the money for the land tax to 
London within twenty days of its receipt, and the money 
for the others within forty days of its receipt. In the 
case of the excise the interval varied according to the 
distance from London; it was twenty-one, thirty, and 
sometimes fifty or sixty days. The customs had to be 
forwarded immediately to the head office and no collector 
might keep more than £100. At the beginning of each 
week the head office transferred the receipts of the pre- 
vious week to the Exchequer. The same procedure was 
followed in the stamp and salt offices. The hawker and 
peddler office paid into the Exchequer weekly, if it had 
accumulated more than £200. The hackney coach 
office paid in every three months, in case the receipts 
amounted to more than £1,000. The post office paid in 
£700 weekly and its entire balance quarterly. 

After the end of the seventeenth centmry the revenue 
was no longer sent in coin to London. In 1696 the com- 
et The first and second reports are concerned with the collection of the 
revenue. 



m 



National Mon etary Commission 

missioners of excise ordered that no collector in the country 
should send coin if he could obtain a good bill of exchange." 
This greatly simpHfied what had hitherto been a cere- 
monious transportation of money under the escort of 
armed men,^ and the other offices probably soon followed 
this example.^ Although no legal regulation was made, 
this form of transaction had already been generally 
adopted by the revenue offices at the time of the commis- 
sion of 1780 and the succeeding years. As happened 
throughout the development of the English Exchequer, 
the independence of the individuals intrusted with the 
management of the public money led to the adoption by 
the public offices of the ordinary economic methods of 
exchange. 

It does not lie within the scope of this work to enter 
upon a closer examination of the official rights of these 
authorities. It will suffice to call attention to one axiom 
which was of importance in the development of the 
Exchequer — that all its officials were absolutely inde- 
pendent in their application and employment of the 
public money. Each official had to give security depend- 
ing in amoimt on that of the money to be received. He 
must present accounts of the receipts, and hand over 
within the legal interval the amount stated in the accoimt, 
but there was no distinction drawn between his private 
property and the public money in his possession. When 

o Announcement of the commissioner of excise. London Gazette, July 
9-13, 1696. 

& "Treasury Papers," 1697, Vol. XLVII, No. 8, and 1701, Vol. LXXIX, 
No. 66, contain statements of the cost of transporting money in this way: 
£7 6s. must be paid daily for a man and horse. 

c In 1697 the collectors of a poll tax sent their money to London by bills 
of exchange. "Treas. Papers," 1697, Vol. XLVII, No. 8. 

156 



The English Banking System 

in 171 1 the Bank of England petitioned the lord high 
treasurer to use his influence to induce the receivers to 
conduct their business with it, the treasurer applied to the 
commissioners and received the following answer: ''The 
Commissioners will exhort the Receivers, which is all that 
can be done, since they and their security are answerable 
for all failures." ^ The object of the Bank was probably 
to get the business of exchange into its own hands, but 
pressure on the part of the superior authorities failed, 
owing to the independent responsibility of the receivers, 
with whom a large liberty must be left to deal as they 
thought fit with the public money, since the full responsi- 
bility for it fell upon them. 

The natural effect of this axiom was that the receivers 
tried to keep back the money as long as possible and to 
use it to their own advantage. When an inquiry into 
the management of the public money was made in 1780 
it was fotmd, for example, that the receivers of the land 
tax had in their possession balances to the amount of 
£657,000 out of yearly receipts of £2,500,000. The 
alleged reason for this was the difficulty of obtaining 
good bills of exchange and the inadequacy of the pay, 
which according to the old rate was 2d. for every £1 
collected. People were forced to use the money for their 
own purposes in order to secure a competence. ^ Besides, 
these balances also served sometimes to meet liabilities 
incumbent upon them. 

The expenses which the revenue offices had to meet 
consisted partly in their own costs of management, 

o "Treasury Papers," 171 1, Vol. CXL, No. 4. # 

& First report of the commission of public accounts, 1780. 



157 



National Mon et ary Commission 

partly in expenditure authorized by law on behalf of 
other branches of the public service. The former were 
fixed by law or by royal order, and were allowed by the 
Treasury accordingly; in the latter case the act grant- 
ing the money generally provided that the receipts of 
this head of revenue should be registered separately 
from all others by the revenue officers and should be 
regularly devoted to certain specified payments. This 
led to direct transactions between the different public 
services for which these payments were to be made and 
the revenue offices, which transactions must however 
always rest on a definite legal basis. Hence when the 
accounts of the revenue offices were audited on the 
account side of the Exchequer, the quittances for the 
money paid in to the receipt side had to be checked, 
and, in addition, the use made of the remaining money 
had to be inquired into and compared with the provisions 
of the corresponding act of Parliament. On the receipt 
side only the net receipts of the public revenue were 
accumulated. 

The procedure there, which was of importance in 
regard to the transference of the business connected 
with the public money to the Bank, was based for the 
later period upon 8 and 9 Will. Ill, c. 28, 1698; but this 
act only confirmed in essentials the system in use from 
ancient times. ^ The different receivers of the revenue 

o It is entitled: "An act for the better observance of the course anciently 
used in the receipt of the Exchequer." For the older procedure see 
Gneist, whose account follows Thomas's book referred to above. The 
actual administration during the eighteenth and at the beginning of the 
nineteenth century is described in detail in the "Report on the Ex- 
chequer," P. P., 1 83 1, 431 and the "Return on Public Income and Expend- 
iture," P. P., 1869, 336 I, p. 338 et seq. 

158 



The English Banking System 

paid their money, within the above-mentioned inter- 
vals of time, to one of the four tellers, each of whom 
was concerned with the receipt of a specified branch of 
revenue. The teller then sent a slip of parchment, the 
''teller's bill," upon which the amount received was 
specified to the so-called tally court. There the bill 
was received by the clerk of the pells and entered in his 
book of introitus, or receipt. A similar entry was made 
by a clerk of the auditors of receipt in the bill of the day. 
Finally a copy of the teller's bill was made by marking 
the name of the person paying in the money, the head 
of the receipt, the amount and the date, upon the tally. 
This certification of the payment {solutum) was called 
a tally of sol, and was given next day to the person 
who had paid in the money. At the end of the day the 
bill of the day was again sent to the clerk of the pells, 
who now entered all the receipts of the day in a cash 
book. The book called Introitus appears to have been 
a ledger, the entries in which v/ere valid outside the ofiice — 
e. g., at the audit of accounts before the Court of the 
Exchequer ("it is held to be evidence in courts of law ") — 
the cash book was only for use in the office. It served 
as a check on the tellers, who had to account for the 
sums entered therein. The custody of the public money 
was intrusted to the clerk of the pells and the chamber- 
lain (in later times to the auditor of the receipt) in con- 
junction with the tellers. At the end of each day the 
cash in hand was examined by them, or rather by their 
clerks, and compared with the amounts in the cash book. 
The teller had to render account by means of vouchers 



159 



N ational Monetary Commission 

(orders of bills of assignment regularly issued) of the way 
in which the difference had been disposed of. 

(j) The right of assignment. 

The receipts from all the heads of revenue were paid 
into one central treasury, but they were not regarded 
as a single fund, out of which money, as it came in, could 
be used for the public expenses without regard to the 
object of the payments. Each separate head of revenue 
was charged with definite payments, and the different 
subheads into which any head of revenue might be divided 
were regarded, either each by itself, or several together, 
as distinct funds. Thus, for example, the customs 
duties for one year were divided into no less than 74 
subheads, according to which the receipts of the customs 
and the payments charged thereon were reckoned. 
Thus instead of one large balance in hand, there were a 
dozen, since the surplus under one head could not be 
applied to meet the deficit under another. 

Attempts at consolidation began with the increase 
of the public debt, the receipts from various taxes being 
united to pay the interest and for the redemption of the 
debt. No less than six such funds were formed betv/een 
1697 and 1 710. Their union into a single fund followed 
in 1 71 5 and in this way all the payments arising out of 
the management of the debt were in some sort charged 
on a single fund. For in practice the separation in book- 
keeping of the receipts and expenditure had had the 
same effect as if there had been so many distinct funds. 
The system of separate funds was continued for the 
remaining branches of the public service imtil 1786, 
when the consolidated fund was formed. 

160 



The English Banking System 

Although the pubHc money in the Exchequer was 
assigned in this way to different objects, there was only 
one authority competent to order its issue. As soon 
as the revenues are paid into the Exchequer the King 
alone can dispose of them, they become Crown property. 
The "King's taxes," the "King's revenue" are the 
expressions used in the laws. The King orders the issue 
of the money by means of the great seal or the privy 
seal,^ warrants under which are sent to the treasurer, 
or rather to the lords commissioners, the chancellor of 
the exchequer, and rmder treasurer. The warrants are 
executed by the orders of these persons. Originally 
this was done by word of mouth, but since the office was 
put into commission it has been done by a written war- 
rant signed by three or more of the lords commissioners. 
This warrant instructs the auditor of the receipt to issue 
an order of payment to one of the tellers. It refers 
to the royal warrant and states the funds out of which 
the money is to be paid. The oldest forms of these 
orders which survived till more modern times were 
called "debentures." They were payable at sight. 
In addition however to these there were orders of pay- 
ment, which had to be signed at the Treasury again 
before they were honored and w^hich, since Charles II 's 
reign, must be accompanied by a letter of direction or 
issuing letter. The salaries of the officers of the Exchequer 
and payments made at the special direction of the Privy 

'^ "These (great seal) are the methods whereby the King's pleasure is 
to be known for the issuing of money." (Speech of Lord Keeper Somers 
in support of his judgment on the Bankers' Case, 12 Will., III.) See 
Howell, "State Trials," London, 18 12, vol. 15. This speech is celebrated 
on account of the learning with which it describes the history and func- 
tions of the Exchequer. 

68299° — II II 161 



National Monetary Commission 

Council were excepted from this clumsy procedure and 
could be made on the authority of a simple warrant 
from the Treasury. 

The King's liberty to dispose of the money in the Ex- 
chequer was limited after William's time owing to the 
appropriation by Parliament of the taxes voted, which 
appropriation became the regular procedure. In the dis- 
position of these revenues the Crown had a definite com- 
mission to execute. ''The Crown becomes a trustee either 
for the public uses and services to which the money is 
appropriated or for the interest of the public creditors 
who have a property in the several duties and revenues 
purchased by them upon the faith of public credit and 
the authority of acts of Parliament. "« Hence a distinc- 
tion grew up between the appropriated funds, the money 
voted for the service of the current year, and that voted 
for the expenses of the civil list. In the case of heads of 
revenue permanently appropriated for definite objects — 
e. g., for the redemption of debt — payment was made 
through the auditor without a royal rescript, on the 
authority merely of a treasury order citing the act of 
Parliament in question. The latter condition was often 
dispensed with in the cases, which were both frequent 
and important during the eighth century, where credit 
was employed. The individual creditors sometimes re- 
ceived a treasury repayment order when the loan was 
raised, or the obligation to repay was legally regulated 
and connected with the bills issued, without the inter- 
vention of the Treasury. 

a Robert Walpole. " Draught of an Intended Vindication of Sir R. W. 
by Himself" in "Memoirs of Sir Robert Walpole," by William Coxe, 
London, 1788. Bk. III. 

162 



The English Banking System 

The issue of the money voted for the service of the 
current year was made by warrant under the privy seal, 
the warrant was kept within the limits of a possible 
appropriation and was executed by the Treasury. 

The assignments for the expenses of the civil list were 
made in the form anciently in use, until the restoration, 
after which the procedure was shortened. Instead of 
continually making new orders under the great and 
privy seals for the regularly recurrent payments (expenses 
of the household, salaries of civil servants, etc.) the King 
issued rescripts in each of these forms which served as 
standing authorizations to the Treasury to assign money 
for certain heads of expenditures, or at any rate simpli- 
fied the assignment. The provision of these letters 
patent dormant or privy seals dormant is usually one of 
the first ways in which the King exercises his authority. 
In the case of letters patent under the great seal the 
clause runs thus: the Treasury is requested to pay 
"such sum or sums of money as to you shall seem reason- 
able and fit to be allowed and paid in such cases"; in the 

case of letters of privy seal: ''that you pay such 

sum or sums of money for any public or particular uses 
and services as we by any warrant or warrants under our 

royal sign manual shall direct to be paid." In 

the latter case a special order of payment from the King 
was also required, but it was supplied in the more con- 
venient form of an order under the royal sign manual. 
Thus the Treasury had only an indirect right of assign- 
ment, whence the duty of the auditors of the receipt to 
see that its orders agreed with the royal warrant or with 
the act of Parliament. The importance of the royal right 



163 



N ation al Monetary Commission 

of assignment diminished with the growing custom of 
appropriating the taxes as they were voted, and became 
eventually a formality which was preserved as part of the 
traditional fiction that the Crown alone has the right to 
dispose of taxes. 

Hence a strict centralization of the system of pay- 
ment was necessary and this constitutes the real impor- 
tance of the right of assignment vested in the Crown, so 
far as it concerns administration of public money. 

(4) The administration of money by the pay departments. 

With the exception of the payments made by the 
collectors and receivers, all money was issued through 
the Exchequer. The issues consisted partly of actual 
payments, partly of the transfer of public money with a 
view to further employment and to be subsequently ac- 
counted for. To the first belonged part of the salaries 
of civil servants, pensions, royal bounties, and the pay- 
ment of interest on, and the capital of, certain debts. 
To the second belonged the remainder of the payments 
to civil servants and all expenses for the army, the 
details of which were managed by the treasurer of the 
household, and the paymaster of the forces, respectively. 
The payments made to the household need hardly be con- 
sidered in connection with the development of the ad- 
ministration of public money. Not only were they 
unimportant in themselves, but they received little 
attention. The civil administration was the business of 
the Crown, but Parliament undertook the administration 
of the army through its grants of the annual supplies. 
The moneys assigned to the ptupose were "public moneys" 



164 



The English Banking System 

in the strict sense. The greater part of the pubHc debt was 
incurred in this department and hence the management of 
the money devoted to it was, throughout the eighteenth 
century, the special object of parHamentary inquiry .« 

According to the oldest Government balance sheet 
extant the issues for the Custodia of England in 1421 
amounted to £46,286 out of total payments of £62,236.^ 
In 1660 the proportion was £1,013,000 for army and 
navy, against £42,400 for other expenses/ During 
James II's reign the average for three years (1685 to 
1688) was £1,111,839 for army expenses, £587,524 for 
other expenses.^ In the first three years of William and 
Mary's reign (1688 to 1691) the army expenses were 
£8,957,299 as against £1,792,149 for the civil adminis- 
tration/ During the succeeding years and especially 
under Anne, the expenses for the army and navy became 
so heavy that, for example, in Anne's reign the average 
proportion was £5,591,329 : £749,656. These were war 

c^ These inquiries began as early as 1666 when the first commission was 
appointed "to examine all accounts of those who have received or issued 
money for this war." In 1691 we find commissioners for taking the public 
accounts, out of which only the accounts of the army were subjected to 
an inquiry. Under the same title in 1701, 1703 (Paymaster Ranelagh 
expelled from the house), 171 1 (impeachment of Marlborough), 17 12 (im- 
peachment of Robert Walpole as treasurer of the navy), 17 13 (the com- 
mission of inquiry, of the previous year, into the accounts of the army, 
prolonged), 1726 (inquiry into the state of the public debt), 1746 (inquiry 
into the state of the land and marine forces). The most important of the 
committees appointed to inquire into the whole question of the adminis- 
tration of public finance were those of 1780 and 1797. 

& Printed in Hatsell "Precedents," vol. 3, Ap. 3, also in Rymer's 
"Foedera," Vol. X, pp. 113, 114, The receipts were £55,754 los. 
lo^d, the issues £62,235 i6s. lo^d. 

cCobbett, "Parliamentary History," 1806, vol. 4, p. 118. 

^Cobbett, loc. cit., vol. 5, p. 189. 

« These and the following figures are taken from the annual public 
accounts given in the "Returns on Public Income and Expenditure" from 
1688 to 1869. 

16s 



National Monetary Commission 

years, but even after a long period of peace (1738) the 
proportion was still £1,780,000 : £880,000. This was the 
lowest point of the expenditure on the army and navy. 
After this it rose again, until toward the end of George 
II's reign (1760) it reached £13,500,000, as against an 
outlay of £1,150,000 on the civil administration. Under 
George III the expenditure on the army in time of peace 
was three times that on the civil administration, while 
in time of war the former rose to £20,000,000, £26,000,000, 
£28,000,000, and even £41,000,000, against £2,500,000 
for the latter. 

Most of the expenses for the civil administration were 
paid through the Exchequer. It can hardly be supposed 
that the treasurer of the household attained much impor- 
tance in this connection. On the contrary the develop- 
ment of English financial management may be said to 
be influenced only by the procedure evolved in the adminis- 
tration of the forces combined with that which grew up 
in the Exchequer. The administration of the forces was 
early divided into the services of the army, the navy, 
and the ordnance. The votes in Parliament, as well as 
the assignments of public money for the administration 
of the forces, were made under these three heads. Each 
of these services had a head pay office which received 
from the Exchequer the portion of public revenue voted 
or otherwise assigned to the service in question, carried 
out the detailed expenditure, and rendered accounts for 
the whole amoimt. The three offices were that of the 
paymasters-general of the forces, that of the treasurer of 
the navy, and that of the treasurers of the ordnance. 
The pay offices of the two hospitals of Greenwich and 



166 



The English Banking System 

Chelsea were added to these in the eighteenth century. 
The principle of complete independence in the application 
and employment of the public moneys held good for the 
pay offices as well as for the receipt offices. 

The charge of public money entailed the duty of ren- 
dering accounts, but the money passed into the possession 
of the paymaster who was charged with it, and he was 
only answerable for applying it in accordance with the 
acts of Parliament or with special instructions received. 
His whole property was liable for any neglect of duty. 
His heirs and legal successors inherited this liability and 
it only ceased when his accoimts had been examined and 
discharged by the auditors of imprest and he had received 
his quietus. He was the accredited agent for the prop- 
erty of the State. He received his instructions by an 
order from the public authorities. He was discharged 
after giving evidence that he had carried out these instruc- 
tions in accordance with the legal provisions and the 
established customs, public money was advanced to him 
in order that he might so carry them out, and for this 
money he had to present accounts. 

It might happen that either the paymasters had to 
make good in case the proof of correct application were 
tmsatisfactory or, on the other hand, that they might claim 
the repayment of money to themselves . They were allowed 
to make payments for which they had received no money 
but were not obliged to do so.^ 

a The position of the paymasters is described in the numerous Reports 
on public accounts already referred to, which were issued by Parliament 
in the course of the eighteenth century. The advantages and disadvan- 
tages of the system were brilliantly described by Burke, in a speech on 
February ii, 1780. Cobbett, "Parliamentary History, " vol. 21, p. i 
et seq. 

167 



N ation al Monetary Commission 

The paymasters were usually persons of high rank, 
members of the House of Commons or belonging to the 
leading families in the cormtry. This gave some security 
for the exact performance of their duties. We shall, 
however, have occasion to notice later the dangers to 
public property which this system entailed. In general 
it may be said that the rule which prevailed throughout 
the English financial system of independent personal ad- 
ministration of the public money by the receipt and issue 
offices had the undesired result that people used for pri- 
vate ends the money which they were supposed to ad- 
minister in the public interest. It was a temptation to 
the officials to keep large balances in order to enjoy the 
interest on them, and in this way the State was deprived 
of profit; moreover, the way in which the presentation 
of accounts was managed led to confusion and insecurity 
as to the position of the finances and resulted in actual 
loss. 

In the eighteenth century the originally arbitrary 
assignment of the issues for the administration had 
already grown into a systematic division, according to 
estimates as between the different objects of expendi- 
ture, of the money voted in large sums. Estimates had 
indeed been made before « with regard to the internal 

a Thus as early as 1433 the lord high treasurer, Ralph, Lord Cromwell, 
laid three "establishments" before Parliament "showing the particulars 
of the whole revenues and profits of the Crown with the charge out of 
them," Cobbett, "Parliamentary History," vol. i, July 8, 1433. This 
was repeated frequently in the. seventeenth century. Thus the lord chan- 
cellor presented estimates on June 18, 1625, which contained: (i) The 
estate the late King left. (2) The estate the King now stands in. (3) 
How it will be in the future. The last division is divided into 10 sub- 
divisions, specifying the claims for unpaid debts, outstanding payments of 
subsidies, and the army. Cobbett, loc. cit. 

168 



The English Banking System 

objects of the financial administration, and the exact 
development of the whole system of accounts in the 
Exchequer points to their existence; but it does not 
appear how far they served as the basis for expenditure. 
From the time of William and Mary onward the votes in 
Parliament were, however, based upon estimates, and also 
the money so voted was assigned to the public offices in 
accordance with these estimates.^ 

The expenditure on the administration of the forces 
alone was the object of a special vote in Parliament, 
while for the permanent expenses of the civil service the 
Exchequer was supplied with permanent assignments; 
consequently the making of estimates and the subsequent 
division of supplies according to the establishments corre- 
sponding to these estimates were confined to the navy, 
the army, and the ordnance. The paymaster and treas- 
urer made their claims to the Treasury in the course of 
the year on the basis of the establishments, in order that 
they might dispose of portions of the sums assigned to 
them. The Treasury obtained the royal warrant for 
this, and the payment followed according to the pro- 
cedure of the Exchequer. The paymaster of the forces, 
until 1758, used to receive a third of the amount for the 
year every four months, subsequently he received from 

0- This is shown by the regular presentation of estimates and accounts 
to Parliament, which estimates are given, some by Cobbett, some in the 
reports of the commissions of inquiry referred to above. Thus Robert 
Walpole in his " Letter to a Friend Concerning the Public Debts, Particu- 
larly that of the Navy, 1712" (Lord Somers's "Tracts," Vol. XIII, "The 
Debts of the Nation, Stated and Considered"), says that in the case of 
the land service "estimates of the whole expense are given in to the 
Parliament; according to those estimates the respective sums are granted 
and pursuant to them estabUshments are made, regulating the whole 
expense of the army and subject to no alteration or enlargement." 

169 



National Monetary Commission 

time to time the sums required for payment. The treas- 
urer of the ordnance obtained the money for the ordnance 
services every month. 

The paymaster's claims, at least during the second half 
of the century, were accompanied by a statement of the 
special head of the service to which the money was to be 
applied and were examined by the auditor of the receipt 
to see whether the sum demanded by the paymaster was 
within the credit allowed him by the Treasury and whether 
the latter was in accordance with the parliamentary grant. 
But it was not within the province of either the Treasury 
or the auditor to inquire whether there was need for the 
transfer of the money at the time when it was demanded. 

The way in which the money was assigned and ac- 
counted for may be examined more closely in connection 
with the pay office of the paymaster-general of the forces. 

As soon as the supplies had been voted by Parliament 
the secretary for war sent various establishments to the 
paymaster-general of the forces. These stated the allot- 
ment of the sum voted among the various regiments, 
corps, and garrisons for officers and privates per day and 
year. At the same time a royal sign manual was obtained 
by the Treasury which authorized it to make over money 
from time to time to the paymaster-general, out of the 
money voted for the army by way of imprest, and upon 
account. 

This sign manual was discharged by a treasury warrant 
and an order from the auditor of the receipt, and after it 
had been registered by the paymaster was deposited in 
the Exchequer. The paymaster was credited through the 
sign manual with the amount of the sum specified therein. 



170 



The English Banking System 

which, however, was only used through the intermediacy 
of the Treasury. He stated the desired amount and the 
object of expenditure to the Treasury, and received from 
it an issuing letter by means of which he obtained the 
money required. This continued until the credit was 
exhausted. Then a new sign manual was obtained, and 
so on. The last of the sums remaining out of the parlia- 
mentary grant was issued under a privy seal which con- 
tained in addition a confirmation of all the sums previ- 
ously received. Provided that the stated objects of 
expenditure corresponded to the establishments, the Treas- 
ury raised no objection. The paymaster kept a cash 
book in which were entered all the sums received from 
the Exchequer and any other receipts (profits from bills 
of exchange, deductions from salaries, etc.) . He rendered 
accounts of the expenditure which he had made, which 
accounts were kept separate both for each object of 
expenditure and for each year. Payments were made 
on the basis of the accounts until the sum voted for that 
particular object was exhausted. The accounts referred 
to the payments made "for the services of the year," 
not for those made during the year. Thus, with each 
year fresh accounts were opened and the former ones 
lapsed. A paymaster's accounts were, however, never 
completely discharged unless either the total sum allotted to 
him had been expended or the object of expenditure no longer 
existed. The payments on his accounts continued even if 
he were no longer in office. Hence he and his family 
retained the balance of cash for years and were also per- 
manently accountable and liable for millions. 



171 



N ation al Monet ary Commission 

It was the same in the other pay offices. In the pay 
office for the navy the balance was further increased by 
the fact that the money which was assigned to each sepa- 
rate object was kept distinct. Hence there might be a 
surplus in one case, while another object for which there 
was temporarily nothing assigned that was available 
remained unprovided for. 

Moreover it was an old custom of the Exchequer, based 
on an act of 51 Henry III (1266), that no one should be 
received to account until the accounts of his predecessor 
had been discharged." 

Suits between the paymasters and their subaccount- 
ants, inevitable difficulties of collecting the vouchers for 
accounts of payments which had to be made in all parts 
of the world, and the slow procedure in the Exchequer 
itself, each delayed the examination of accounts, so that 
the liability of the paymasters often continued for decades 
after their retirement, and throughout this time they were 
obliged to have some balance in hand to free themselves 
and their families from continual fear of a claim for com- 
pensation.^ 

The commission of 1780 demonstrated clearly that the 
public money was not managed in accordance with public 
interests. Although its reports were at first only a state- 

« The act runs: "That when a sheriff or baiUlt hath begun his accounts, 
none other shall be received to account until he that was first appointed 
hath clearly accounted and that the sum has been received." (Burke's 
speech on financial reform, Feb. ii, 1780.) Cobbett loc. cit. vol. 21, p. i, 
et seq. 

& Thus the elder Pitt, Earl of Chatham who had retired from his 
office of paymaster-general of the forces in 1755, in spite of strenuous 
efforts and the prestige of his subsequent position as minister, only received 
his quietus thirteen years later. (Fox, speech in Parliament, June 11, 
1 78 1.) Cobbett, "Parliamentary History," vol. 21. 



172 



The English Banking System 

nient of facts which the officers of the Treasury must have 
known anyhow, they became ultimately the basis of all 
reforms in the management of the public money and 
accounts.*^ The account given in these reports of the 
relation between the pay officers and the administration 
of the public moneys corresponds with what we have 
already stated in general form, and this is illustrated by 
the following examples : 

Lord Holland, who had resigned his office of paymaster 
general of the forces in 1765, had received £64,000,000 
during his time in office. In consequence of the pay- 
ments which continued to be made on his accounts after 
his resignation, the auditors of imprest did not examine 
these accounts until 1776. In 1780 they were still undis- 
charged and since he had died meanwhile, his heirs were 
liable in his stead. The average cash balance in his pos- 
session amounted to £450,000. The interest on the 
balance which remained in his hands after his retirement 
was reckoned at £250,000. His four next successors, 
who meanwhile had themselves retired also, could present 
no accounts until his were settled. The profit from 
interest — i. e., the loss to the State — on their balances was 
estimated at £290,000. Paymaster Rigby, who had held 
the office since 1768, had had in hand since this time an 
average balance of £453,000. For shorter periods larger 
sums were of course held, thus Rigby during the last nine 

« The commission as appointed by Lord North was non-parliamentary. 
Burke, however, praised its reports thus: "As pieces of Hterary compo- 
sition he never saw style and manner so happily united to a subject — clear, 
correct, nervous, and intelligible." After Lord North's fall the commission 
was strengthened by parliamentary members and became the chief stimu- 
lus to financial reform. 



173 



National Monetary Commission 

months had had on the average £870,000. In the pay 
office of the navy the payments and accounts of four 
treasurers were still running on together. The first of 
these had come into office in 1759, so that the accounts 
for twenty-two years remained unsettled and the balances 
were still in the hands of the respective paymasters. 

In the case of accounts which were examined so long 
after the payments had been made it was often out of the 
question to obtain proof of such payment. Large sums 
had to be noted as unaccounted for and payment enforced 
by legal means if the Crown were not to suffer loss. Thus 
since 1720, £473,000 had stood to the account of the Earl 
of Lincoln as paymaster general of the forces. There 
was, however, nothing in the Exchequer books referring 
to the payment of the sum nor had the heirs any evidence 
of payment, and they indeed declared and proved that they 
had received nothing. Viscount Falkland, treasurer of the 
navy, or rather his legal heirs, had been £27,000 in arrears 
since 1689. It may well be understood that awakened 
public opinion regarded the great paymasters as ''robbers " 
and ''plunderers," "enriching themselves with the spoils 
of the people. "« The evil was not remedied until the 
administration of the public money was transferred to the 
Bank, and it was one of the causes which combined to 
bring about such a transference. 

ct Robert Walpole had complained that people spoke of the " publick 
ministers" in these terms. "Draft of an Intended Vindication of Sir Rob. 
Walpole," by himself (Walpole Papers in Coxe, "Memoirs of Sir Robert 
Walpole"). Particularly serious accusations were made against Lord 
Holland "the grand defaulter of unaccounted millions." See the parlia- 
mentary debates for March 8, 1780. Cobbett "Parliamentary History," 
vol. 21. 



174 



The English Banking System 

(5) The transactions between the public offices and the Bank. 

Owing to the entire independence of the public pay 
offices as regards the expenditure and appHcation of the 
pubHc money, no connection between the administration 
of pubhc money and the Bank was possible except by a 
radical change in the principles on which the offices were 
managed. The first step was to unite the public treasury 
with the Bank. Such a policy had not been foreseen 
when the Bank was founded. Nor were any legal measures 
taken for the purpose during its subsequent existence. 
It must be remembered that such an alteration in the 
financial administration signified the abolition of the 
Exchequer. The procedure of the latter was indeed com- 
plicated and its business methods difficult, but its customs 
had grown up in the course of centuries and use made 
them appear a safe method of administering the public 
finances. The right of the Crown to dispose of the public 
revenue, the entire system of account keeping, and in par- 
ticular the system of borrowing, were closely connected 
with this procedure, which was moreover bound up with 
the management of the different offices in the Exchequer; 
hence the abolition of this central treasury and the crea- 
tion or remodeling of a single large bank depot was impos- 
sible. Such vigorous reforms, which destroy what is 
customary at a blow, have never been undertaken by the 
English Government at any time or in regard to any 
department of the administration. Moreover, the Gov- 
ernment was least of all likely to contemplate a reform of 
its financial system at the time when the Bank was founded, 
a time when every effort was needed to maintain a financial 
system, which was threatened with chaos by the currency 

175 



National Monetary Commission 

reform and the overburdening of the pubhc revenue by 
floating debts. The existing connection between the 
Bank and public finance is thus a gradual growth, bound 
up with the different changes made in the business meth- 
ods of the Exchequer and with the development of the 
management of public money by the receipt and issue 
offices. And when the time came to regulate this con- 
nection by act of Parliament it was merely necessary to 
give legal sanction to a relationship which had already 
grown up in fact. 

The Bank had indeed been early concerned with the 
carrying out of public monetary transactions. Its con- 
cern was, however, at first, not with the Exchequer but 
with the receipt and issue offices. These offices endeav- 
ored to make profit out of the government money which 
they had in hand so long as it was under their control, 
and hence it was natural that they should look around for 
a bank with which they could deposit the money. The 
Bank made various efforts to secure these private deposits 
of public money. It repeatedly requested the Treasury 
to influence the paymasters and receivers to keep their 
cash with it." In December, 171 1, it complained that 
"Some public offices kept their cash with others and not 
with the Bank, and that the greatest part of the receiv- 
ers transacted their affairs in other places, which ought 
to cultivate a good understanding with the Bank from 
the frequent services done them."^ The services thus 

a "Treasury Papers" (record office), Vol. CXVII, 23. In 1709 it 
granted an advance to Sir Henry Furness, the paymaster general of the 
forces, but begged him to keep his cash with it. In 1712 the same thing 
happened in regard to the treasurer of the navy. "Minute Book," Vol. 
XVII, p. 121. 

& "Treasury Papers," Vol. CXL, 4. 

176 



The English Banking System 

referred to, apart from the large advances made to, and 
the loans which the Bank raised for, the Government, are 
no doubt the advances which it made to the different 
offices. The ' ' Treasury Papers ' ' record numerous instances 
of such loans, which were made by the Bank, on security 
of the usual bills, to the offices of the paymaster of the 
forces and the treasurers of the navy and ordnance. 
According to the records extant, these were in some cases 
made through the Treasury, which negotiated with the 
governor of the Bank.*^ In other cases the paymaster, 
after having applied to the Treasury, received from it an 
order to hand over to the Bank a number of the bills 
issued by the Exchequer and to receive from it the sum 
required.^ The interest was agreed upon for each case 
separately ; ^ and the amounts were regularly repaid in a 
short time, with interest. It sometimes happened that the 
Bank refused an advance of this nature.^ The Treasury 
and the Bank were completely independent of one another. 
During the eighteenth century the connection between 
the Bank and the public offices grew continually closer. 
It was, however, not the only financial institution with 
which business was transacted. The elder Pitt for 
example, when he was paymaster general, kept his cash 
partly with the Bank of England, partly with other banks. ^ 
But it is noteworthy that all other banks were known as 
"private" banks. And when in 178 1 the renewal of the 

o As in both the cases quoted, 

& "Treasury Papers," 1709, Vol. CXLVII 7; 171 1, Vol. XLVII, 7. 

c In 1 7 1 2 the rate of interest was 6 per cent and corresponded to the 
current rate on the public debt. 

d "Treasury Papers," 1706, Vol. XCIX, 58; 1709, Vol. CXIV, 26. 

€ Fox, speech in House of Commons, June 17, 1781 (Cobbett, "Parlia- 
mentary History," vol. 21). 

68299° — II 12 177 



N ation al Mon et ary Commission 

Bank Charter was discussed,'^ Mr. Ewer, the governor of 
the Bank, was able to say that '' the pubhc were by far the 
best customers the Bank had." Its credit, its power 
of accommodating government, arose solely from its 
being the cashier of the public.^ I^ord North called the 
Bank "the public exchequer." But it was expressly 
stated that although nearly all the paymasters kept their 
cash at the Bank, they could at any moment withdraw it 
and place it with a private banker. The Bank acted 
merely as a banker and the relation between the public 
offices and the Bank was no more than that between a 
private person and his banker. 

But by this time it had relations with the State which 
were not confined simply to the deposits of cash by the 
receipt and issue offices. At the beginning of the eight- 
eenth century the use of bank notes as currency had 
become a universal practice. The Exchequer, or rather 
its cashiers, the tellers, found themselves in possession of 
a large number of these notes every day. They were, 
however, liable for the balance of their money in cash, 
and hence were obliged to present these notes immediately 
to the Bank, in order either to obtain cash, or to be assured 
that the notes were genuine. Possibly the receipt for a 
payment in notes was not given until such assurance was 
received. On the other hand the custom had grown up, 
as early as the second decade of the eighteenth century, 

« Cobbett, "Parliamentary History," vol. 22, debate of June 13, 1781. 

b According to the statement of the commissioners on public accounts 
the following kept their cash with the Bank at that time: customs, excise, 
stamp, post and salt offices, the various receivers of the land tax, the 
paymaster general of the forces, the treasurer of the navy, and the treasure! 
of the ordnance. Sixth report, 1781, Ap. 68. 



178 



The English Banking System 

owing to the adoption as a form of currency of government 
paper credit — the exchequer bills — of anticipating the 
receipts of certain taxes (land tax, malt tax, sugar duty) 
by an advance from the Bank on the security of such 
exchequer bills, which advance was paid back as the taxes 
came in. In return for bank notes or coin, a corresponding 
number of exchequer bills were given back. In time also 
the Bank had other claims, for the payment of the interest 
and the management of the public debt owed either to itself 
or to other creditors, and for the cashing of bills of ex- 
change, etc. The paymasters who kept their cash with 
the Bank had the money transferred to it; the receipt 
offices which had deposits there or had bills of exchange 
on it, drew money from it. Hence it was the center of a 
great part of the system of public payments, each stage 
in which (unless it was a payment from a paymaster to a 
private individual third person) had to be notified to the 
Exchequer, in order that the book entries which were 
needed for the public accounts might be made. In this 
way business relations grew up between the Bank and 
the Exchequer which for a later period (the end of the 
century) are described as follows :« 

One or more clerks from the Bank are in daily attend- 
ance at the Exchequer. The person paying in the money 
deposits it with one of the bank clerks, from whom he 
receives a ticket stating the receipt, the name of the person 
paying in the money, and the head of revenue upon which 

a "Journals of the House of Lords," Vol. XLI (36 Geo., Ill) p. 196. 
Inquiry into the loans made by the Bank to the Government. Interroga- 
tion of the head cashier of the Bank. "Report of the Commissioners of 
Public Accounts, On the Exchequer," P. P. 183 1, 313. (Evidence of differ- 
ent officers of the Exchequer, of the revenue offices, and of the Bank). 



179 



National Monetary Commission 

it is paid. This ticket he takes to the teller's office where 
he himself registers the payment in a book. This entry 
is checked by the teller and compared with the ticket, a 
copy of which he then sends to the tally court. If the 
person paying in the money has an account at the Bank 
he previously obtains from the latter bank notes, rendered 
unusable for ordinary circulation, for sums of £i,ooo each. 
At the end of the day a reckoning is made by the tellers 
and the bank clerks, the payments to be made by the 
Bank are compared with the money received and the 
difference is paid. This payment is likewise made with 
these "cancelled" bank notes if it exceeds £i,ooo. Ex- 
chequer bills for a like amount can also be used. Small 
sums are paid in coin. When the Bank has a larger pay- 
ment to make to the Exchequer — e. g., in consequence of a 
loan — this too is made with these cancelled bank notes or 
with exchequer bills. These were only pass tickets which 
were transferred hither and thither as evidence of credits 
or debits, and to serve as a visible basis for the entries at 
the Exchequer. Hence, the transactions in coin at the 
Exchequer were very small. In 1797 they amounted to 
between £50,000 and £60,000 a day. 

It is most probable that this procedure was established 
long before the time when the Bank legally took over, or 
rather was charged with, certain receipts and issues. The 
report of 1797 speaks of it as existing "time out of mind, " 
and that of 1831 remarks that: " For nearly a century the 
Bank of England has sent down to the Exchequer persons 
duly authorized to examine and receive its own notes." 
Also 9 Anne, c. 7, 17 10, provides that exchequer bills, not 
exceeding 50 in number, shall be issued for £5,000 each; 



180 



The English Banking System 

which bills " shall be current only as payments between the 
Exchequer and the Bank of England." It may indeed be 
supposed that these payments were only made on account 
of the loans which the Bank had at that time already 
begun to raise, and of the obligation of the Government 
to pay interest to the Bank and to cash the short-date 
bills which were in the latter 's possession. As early as 
1 710 the Bank raised a lottery loan for the Government," 
and the floating debt which was paid off in the course of 
the year amoimted to over £3,000,000,^ for a large part 
of which the Bank was certainly the creditor. 

The current payments into and withdrawals from the 
Bank on the part of the receipt and issue offices may thus 
have grown out of the kind of financial transactions which 
arose between the Bank and the Exchequer owing to the 
system of raising loans; and this to an increasing extent 
as the Bank came to act more and more as a depository 
of cash for these offices. But when most of the actual pay- 
ments were undertaken by the Bank it seemed natural not 
to give the money to the tellers merely in order that they 
might hand it over to the Bank after they had subtracted 
from it the balance required for their own use, but rather 
to pay it direct to the Bank, which made payments for 
the tellers and reckoned with them. Probably, however, 
the old relation was maintained. Exchequer bills, and, 
later, bank notes, were kept in the tellers' chest, corre- 
sponding to the sum which stood to their credit at the 
Bank; and if the Exchequer had a payment to make, it did 
this in fact by handing over to the Bank such bills or notes. 

« 8 Anne, c. 4. 

&Cf. "Ret. Nat. Debt," p. 4. 



181 



N ation al Mon etary Commission 

Perhaps the exchange of exchequer bills and bank notes 
may be traced back directly to the fact that the Bank was 
originally a creditor of the Government. It possessed 
the government bills. If the Government received money 
it gave it to the Bank and redeemed its debt. I^ater, 
when the Bank received payments, it became the debtor 
of the Government. It gave up its notes, and if the Gov- 
ernment made a payment through it the notes were 
returned. 

The date when this change occurred can not be deter- 
mined. Between 1710, when the first large issue of ex- 
chequer bills took place, and 1780, when the procedure 
was fully developed, seventy years had passed during 
which the Government had entered into the closest con- 
nection with the Bank, mainly through the development 
of the public debt. The reason why no legal regulation 
of the administration of public money was made dur- 
ing these years may be that this administration had 
grown to a desired simplicity through the freedom of 
action allowed to the pay offices. It is true that the 
management of the public money was not legally handed 
over to the Bank, but the tellers had in fact transferred 
their chest to it, and managed their payments through it. 
The great paymasters had done the same thing. The 
final step which the Government had to make was to 
declare that all such deposits in the hands of the Bank 
were public deposits. The transformation of the Ex- 
chequer into a mere office for keeping accounts and of the 
offices of the paymasters into mere offices for assign- 
ment , necessarily followed from this. 



182 



The English Banking System 

PART HI. 

THE LEGAL DEVELOPMENT OF THE RELATIONS BETWEEN 
THE BANK AND THE ADMINISTRATION OF THE PUBLIC DEBT 
AND PUBLIC MONEY. 

I. THE BANK AND THE ADMINISTRATION OF THE PUBUC 

MONEY. 

(i) The reforms in the administration of public money 
between lySo and 18J4. 

The financial disturbance due to the American war 
and the bad administration of the North ministry led 
toward the end of the eighth decade of the eighteenth 
century to a general demand for a reform in the expen- 
sive and insufficient financial organization, especially 
with regard to the Exchequer and its dependent treas- 
uries. Burke gave eloquent expression in Parliament 
to this need in a speech on February 11, 1780, and ex- 
panded his statement into a scheme for an important 
financial reform. « Most of the reforms in financial ad- 
ministration which were carried out dtuing the next 
fifty years owed their origin to this. Burke's project 
made appeal for a simplification of the Exchequer and 
of the highly paid offices connected with it, which offices 
had become mere sinecures; for parliamentary control 
of the civil list, and the introduction of definite heads of 
service for the civil administration; for the appropria- 
tion of fluids for that portion of the civil administration 
which had not hitherto been under parliamentary control ; 
and for a reform of the pay offices of the army and navy. 
In describing the latter he referred to the relations of 

^Cobbett, "Parliamentary History," vol. 21, p. i et seq. 

183 



National Monetary Commission 

the paymaster and treasurer to the Bank. The method 
of assigning money to the paymaster of the forces and the 
treasm^er of the navy must cease since it injured the 
State and unjustly enriched private persons. The money 
must no longer be paid to them but to the Bank, and they 
must make their payments, with the exception of those 
for small expenses, by drafts on the Bank. Both Bank 
and pay offices must keep accounts which were to be 
made up and audited at the end of the year. The balance 
remaining was to be carried over to the next year, and 
when a paymaster retired, was to be transferred to his 
successor. In return for the profits made out of the 
employment of the public money the Bank must under- 
take "the charge of the mint" and ''the charge of remit- 
tances to our troops abroad." If the Bank would not 
consent to this the Treasury was to negotiate with any 
other banker of repute. ''There is no banker, who will 
not be at least as good a seciu-ity as any paymaster of 
the forces or any treasurer of the navy, that has ever 
been banker to the public." 

The "establishment bill," which embodied these re- 
forms, was thrown out by Parliament. But it led at 
any rate to the appointment of a commission to inquire 
into the financial administration, and after Lord North's 
fall in the following year, the new ministry, in which 
Burke was appointed paymaster of the forces, began, al- 
though very cautiously, to carry out reforms on the 
basis of the report of the commission. 

The Exchequer was first dealt with. Here the chief 
advantage of the reforms was not a change in organiza- 



184 



The English Banking System 

tion, but the fixing of definite salaries.® In 1783 the 
ofiice of chamberlain was suppressed, and it was pro- 
vided that instead of tallies, the auditor of the receipt 
and the clerk of the pells should give indented cheque 
receipts.^ Two years later the audit office of the audi- 
tors of imprest was abolished and in their stead com- 
missioners for auditing the public accounts were ap- 
pointed, whose duties, though no more extensive, were 
definitely organized.^ Otherwise the receipt side of the 
Exchequer continued to exist for some decades, with all 
its formalities, and with the fiction that the government 
money was collected in its chests, although in actual fact 
the tellers' chest had been transferred to the Bank. 

The moneys of the paymaster general of the forces, 
on the other hand, were transferred to the Bank in 1783,^ 
and this was soon followed by a similar change with 
regard to the navy and ordnance offices. From this 
time onward each pay office had an account at the Bank 
through which sums were made over to it and out of 
which its payments were made. But the conditions under 
which Biurke had proposed to hand over the administra- 
tion of public money to the Bank were never imposed. 

oThe incomes of the persons holding offices in the Exchequer had 
reached an unexampled amount, which was made up almost entirely from 
fees. Thus in 1780 the auditor had £19,930; each of the tellers, £9,954; 
the clerk of the pells, £9,543 ("6th Report, Com. Publ. Ace," 1780). On 
the account side the income of an auditor, for example, amounted to 
£15,000 a year ("8th and 12th Rep."). The actual work was done by 
the deputies of the officers mentioned. The officers were deprived of the 
right to appoint deputies by 23 Geo. Ill, c. 82, by which act also fixed 
salaries were assigned to them. 

& 23 Geo. Ill, c. 82. The tallies were not finally abolished until the 
retirement of the last chamberlain in 1826. 

C25 Geo. Ill, c. 52. 

^ 23 Geo. Ill, c. 50. 

185 



N ational Monet ary C ommis s ion 

No profits accrued to the Government, neither was any 
indemnity demanded by the Bank. The Bank was 
still making the same tacit use of the deposits when, in 
1806, its relations with the receivers-general were defi- 
nitely regulated." The excise, stamp, post, and customs 
offices were ordered to pay into the Bank all moneys 
received by them, with the exception of small sums, 
fixed in amount by law, which might be retained for 
current expenses. The account of each office was kept 
in the name of the receiver-general concerned, who alone 
could dispose of the money. This act also recognized 
to some extent the custom which had grown up in the 
practice of the Exchequer of making fictitious transfers 
from the public treasury to the Bank. The payments 
of the balances in the bands of the receivers into the 
Exchequer was continued, but the act expressly instructed 
the receivers-general to draw out the money at the times 
specified in the instructions — i. e., to receive "cancelled 
bank notes," and to pay these into the Exchequer, or, 
as it might happen, to hand them over to the bank clerk 
attending there on behalf of the teller. The clerk brought 
the notes back again to the Bank. In spite of its com- 
plexity this procedure continued unaltered until 1834. 

During the period which elapsed between the regu- 
lation of the receipt and issue offices and the transference 
of the public treasury to the Bank a custom arose, which 
was due partly to the concentration of the revenue at the 
Bank, but whose original cause dates from a much earlier 
time. This was the organization of those loans from 
the Bank to the Government which were intended to 

O' 46 Geo. Ill, c. 75, 76, 83, 100. 
186 



The English Banking System 

cover temporary excess of expenditure over income, 
arising during a given financial period, when the total 
expenditure during this period was covered by notes of 
supply. Even in George II 's reign it had become usual 
for the Bank to place each year at the disposal of the 
Treasury, to be used as required and when convenient, 
a sum in anticipation of the land and malt taxes, which 
sum was specified in the act granting these taxes and was 
advanced on the security of exchequer bills; it was paid 
off in the course of the year as the receipts for these 
taxes came in. The annual renewal of the taxes and of 
the authorization of this loan from the Bank made this 
running credit allowed to the Government at the Bank 
play an important part in the administration of the public 
moneys, and the more so considering the amount of the 
receipts from the taxes. This credit did not, however, 
afford the security of a regular cover for any cash deficit 
that might arise. The formation of the consolidated 
fund in 1787 was of importance in developing a relation 
of this kind. 

The disadvantages of the system of separate funds 
had been pointed out in 1785 by the commissioners of 
public accounts, who had suggested the formation of a 
single fund into which all the public revenues should be 
paid and out of which all public expenses should be met.® 
This proposal led to the formation of the consolidated 
fund by 27 Geo. Ill, c 13. A portion of the permanent 
taxes was united under this name and was earmarked 
for permanent expenditure, such, for example, as the 
interest on the public debt. But the receipts covering 

« 13th report. 
187 



National Monetary Commission 

the civil-list expenses were still kept distinct as was also 
the revenue from taxes voted annually. The receipts 
forming the consolidated fund might only be used for 
the purposes to which they had been expressly assigned 
by Parliament. With the exception of the interest on 
the public debt these were mainly the payment of pen- 
sions and of such expenses of the civil service as were not 
already provided for in the civil list. The distinction 
between those expenses of the civil list which concerned 
public administration and the personal income allowed 
yearly to the sovereign, the civil list in the continental 
sense, was first made in 1830, at which date these ex- 
penses were already charged upon the consolidated fund. 
From this time onward there remained only the fund 
and the annual supplies. 

When the consolidated fund was formed it was chiefly 
applied to meet quarterly expenses of a permanently 
recurring type. The act establishing it provided that, 
at the end of each quarter, no money was to be issued 
from the fund until a sufficient sum had been set apart 
to cover the specified quarterly charges. It was hoped 
in this way, as far as possible, to retain the receipts 
assigned to make up the frmd until the end of the quarter. 
Should there be a deficit it was made good out of the 
annual supplies for that year. A surplus was ** applied 
in the first instance to replace advances to make good 
the deficiency of a previous quarter, and then as Parlia- 
ment might determine." This system had the serious 
disadvantage that "the surplus income of one quarter 
could not be made available to cover the deficiencies of a 
previous quarter until the termination of the quarter in 



188 



The English Banking System 

which such surplus might arise." ^ This defect was 
remedied in 1817 by 57 Geo. Ill, c. 48, which act author- 
ized the Treasury to cover a deficit in the consoHdated 
fund by borrowing from the Bank on the security of 
exchequer bills. These exchequer bills, usually called 
"deficiency bills," were paid off in the course of the 
quarter in which they were issued, being discharged by 
degrees as the revenue forming the fund was paid in. 

A similar plan was adopted to cover any deficiency 
that might arise in the supplies voted yearly — the ways 
and means. The malt and sugar taxes which were voted 
yearly had for a long time been assigned to this purpose, 
and "it was the practice to include in the act granting 
them a provision for raising money by the issue of Ex- 
chequer Bills charged upon these duties, and thus to pro- 
vide funds for making good any temporary deficiency of 
these Ways and Means to meet current Supply charges." ^ 
These so-called malt or sugar bills could then be used to 
meet a temporary deficit. This practice was altered in 
1830. An act, II Geo. Ill, c. 2, then provided that a 
sum should be assigned out of the consolidated fund as 
"Ways and Means for the Service of the year," on such 
a plan that exchequer bills might be issued up to the 
amount so assigned and might be "charged on the grow- 
ing produce of the Consolidated Fund in the next succeed- 
ing quarter to that in which they were issued." The 
Bank of England was authorized to make such loans to 
the Government, from time to time, as the needs of the 
supply services required and the exchequer bills were 

« "Report on Public Income and Expenditure," 1869, 366, p. 519. 
&Ibid., p. 520. 



189 



National M on et ary Commission 

handed over to the Bank, which advanced the necessary 
sums. These ways and means bills resemble the deficiency 
bills, "except that they were made payable out of the 
growing produce of the Consolidated Fund in the following 
quarter, and the money raised upon them was appli- 
cable to Supply Services only." Their issue has continued 
since 1830 in the way described. <* 

These temporary advances from the Bank to the 
Government appear in the form of an unfunded debt. 
Had they been nothing further they could not claim 
much importance. But they differed fundamentally from 
the other temporary loans which the Bank made to the 
Government at the end of the eighteenth and beginning 
of the nineteenth centuries. They can not be looked 
upon merely as unfunded debt. The reason for their 
existence is to be found in certain operations in the 
management of the public moneys, which were regularly 
carried out in this way. They led to organized and regu- 
larly recurring transactions between the Bank and the 
Government, which transactions prepared the way for a 
complete transference of the management of public money 
to the Bank. 

{2.) The union of the public treasury with the Bank (18 J4). 

Notwithstanding the attempts to reorganize the special 
offices and various points in the managment of the public 
money, the Exchequer itself, although the object of 
repeated complaints, had undergone no complete reforma- 
tion. Its existence was no longer justified. Its actual 

o For the arrangement of these advances from the Bank to the Govern- 
ment cf. "Report on PubHc Income and Expenditure," 1869, 366, i, pp. 
519 and 520, 



190 



The English Banking System 

functions were to direct the Bank to transfer public 
money to the paymasters, or to carry out such payments 
as were, in accordance with custom, made by it; to check 
the assignments made by the Treasury, and to keep the 
pubHc accounts, though it did not audit the returns 
made by the accountants, which business had been in- 
trusted to a separate audit office as early as 1786. These 
functions required no such official apparatus and com- 
plicated procedure as were still retained. During the 
thirties this gave rise to continual demands for changes. 
In 1830 a commission was appointed to inquire into 
*'the charges of managing and collecting the Public 
Revenue," and this was followed in 1831 by a commis- 
sion to ''examine into the practice of the Exchequer 
with respect to the Receipt and Payment of the Public 
Money and the mode of keeping the Accounts thereof. "<^ 
This latter commission presented its report in the same 
year.^ Its proposals became law and the receipt side 
of the Exchequer was entirely remodeled by 4 Will. IV, 
c. 15 (May 22, 1834). 

The offices of the auditor, the clerk of the pells, and 
the tellers and the ''offices subordinate thereto" were 
abolished, compensation being paid to those holding 
them at the time, and the public moneys were to be paid 
into the Bank to the account of the Exchequer. The 
former exchequer staff was replaced by the following 
officers : 

o Thomas, loc cit., p. 29. 

& The minutes of evidence, documents, and proposals of the commission 
appointed on July 8, 1831, are contained in the "Report on the Exchequer," 
P.P., 1831, 313. 



191 



N ation al Monet ary Commission 

(i) The comptroller-general of the receipt and issue of 
His Majesty's Exchequer. The comptroller had an assist- 
ant comptroller and various other officers under him. He 
exercised the combined powers of the auditor and of the 
clerk of the pells. He kept the books and records referring 
to the receipts and expenditures. All orders for issuing 
public money must pass through his hands and be regis- 
tered by him. He must satisfy himself that such orders 
were in conformity with the royal order or with the par- 
liamentary grant. He had direct control over the 
exchequer account at the Bank, and presented accounts 
himself to the Treasury. 

(2) The Bank of England. The Bank undertook the 
duties of the tellers. It received the public moneys and 
managed the issues under the warrant of the comptroller. 
It was responsible to the comptroller and to the Treasury. 

(3) The paymaster of the civil services. A single pay- 
master was appointed by the Treasury to make such pay- 
ments as had hitherto been "payable in detail at the 
Exchequer, ' ' viz. , salaries, allowances, pensions, etc. These 
payments were all connected with the civil service, since 
the army already possessed its own paymaster-general. 
The paymaster of the civil services and his subordinates 
had no independent position but constituted a department 
of the Treasury. 

The principles adopted for the management of the pub- 
lic money were as follows : 

(i) All moneys payable to the Government were paid 
into the Bank either directly or through the intermediacy 
of the receivers. 



192 



The English Banking System 

(2) All public money held by the Bank was to form a 
single fund known as the "account of His Majesty's 
Exchequer." But separate accounts were to be kept for 
the public offices corresponding to the separate services. 

(3) The exchequer account was available to the comp- 
troller-general only and he employed the same on the 
receipt of warrants from the Treasury, which warrants 
must rest either on an order under the royal sign manual 
or a grant of Parliament. 

The paying in of money was accompanied by duplicate 
specifications or statements of the particulars thereof, 
which had been countersigned by the comptroller. One 
of these duplicates was signed by the cashier receiving the 
money for the Bank, the other was retained by the Bank. , 
At the close of the day the Bank transmitted the specifica- 
tions received to the comptroller, and sent a copy to the 
Treasury as a statement of the money received by it, the 
issuing of which was now managed by a new method of 
assignment. 

The distinction between appropriation, supply, and 
civil list services had already been simplified, through the 
formation of the consolidated fund, into a division between 
the expenses charged to this fund and those not so charged. 
But when the old exchequer offices were abolished and the 
comptroller-general was appointed, the method by which 
this assignment proceeded was changed. The issue of 
money for the consolidated fund services was made by the 
Bank on the authority of an exchequer warrant from the 
comptroller-general, who was in his turn empowered by a 
treasury warrant referring to the act of Parliament by 
which the expenditure in question was assigned to the 

68299°— II 13 193 



National M on et ary Commission 

consolidated fund. The assignment of money for the 
supply services was based upon a procedure specified in 
detail by 4 Will. IV, c. 15, the stages of which were as 
follows : 

(i) The annual supplies are granted to the Crown by 
the House of Commons in committee of supply and placed 
at the disposal of the Treasury by a special act — the ways 
and means act. 

(2) The Crown transfers to the Treasury the right of 
making issues of public money by royal order, which 
empowers the comptroller of the Exchequer to assign the 
whole amount of each separate vote under the direction of 
the treasurer. 

(3) The Treasury authorizes the comptroller by warrant 
from time to time to issue exchequer warrants, and by 
these to empower the Bank to place at the disposal of a 
paymaster the full amount of any separate vote. This 
procedure constitutes the general basis for the credit 
allowed to the paymasters at the Bank. In order that 
this may be used — 

(4) The Treasury instructs the comptroller from day 
to day to authorize the Bank to place at the disposal of the 
paymaster the sums demanded by the latter. 

(5) The comptroller then issues the warrant correspond- 
ing to this demand, and 

(6) The Bank finally withdraws the required sum from 
the total revenues entered to the exchequer account and 
transfers it to the account of the paymaster. 

No fundamental alteration was really made by these 
provisions. Instead of the separate appropriations 
hitherto usual, the greater part of the expenditure was 



194 



The English Banking System 

now, once for all, appropriated to the consolidated fund. 
The inclusion of the civil list expenses in this appropria- 
tion was a fundamental extension of the right of appro- 
priation, but did not alter the right of assignment which 
was determined by the appropriation. The control of as- 
signment formerly exercised by the ancient Exchequer was 
now naturally transferred to the comptroller. The special 
assignment orders used when loans were raised, ceased 
of themselves with the organization of the public debt.^ 
The payments were made by the Bank on checks from 
the pay offices, and the sums paid debited to the accounts 
of the latter. The Bank sent a daily return of such pay- 
ments to the comptroller and a weekly return of the 
receipts and payments of the latter to the Treasury. 

The separate accounts at the Bank and the powers 
of the public offices to use the same were regulated by a 
treasiury minute of September 26, 1834.^ "^^^ accounts 
of such public offices as had possessed them since 1806 
were once more expressly recognized as public accounts; 
payments into these had to be made daily by the offices; 
their own expenses of management might be met partly 
by the retention of a small cash balance, partly by checks 
drawn on their accounts; transfers from the exchequer 
account were made three times a week. In addition to 
the exchequer account and to the already existing accounts 
of the paymaster-general of the forces and of the exchequer 
bills, foin: fresh credit accounts were opened as a pre- 
liminary measure, with the following ''public account- 
ed The forms for royal orders, treasury warrants, and exchequer warrants 
were determined by a minute of Sept. 26, 1834. (Printed in "Rep. on 
Public Money," 1856, Ap. i, p. 479.) 

& This minute is printed in the "Report on Public Monies," 1856, Ap. 
I, p. 471. 

195 



National Monetary Commission 

ants": the paymaster of the civil services, the master of 
the mint, the commissioners for the reduction of the 
national debt, and the governor and company of the Bank 
of England.^ 

The internal constitution of these accounts was some- 
what different from that hitherto customary. The re- 
ceipts of the offices possessing accounts and the pay- 
ments made from one office to another in the course of 
administrative business were distinguished from the 
transfers made from the Exchequer, and the Bank was 
instructed to open a cash account for the former and an 
exchequer credit account for the latter and to place them 
at the disposal of the offices. Payments could be made 
from both, but the rule was that the cash account must 
be exhausted before the credit account* was drawn upon. 
This separation of accounts made it for the first time 
possible to check the issues of money from the central 
treasury, which was represented by the exchequer account. 

The ancient central treasury was entirely abolished by 
these changes. After 1834 it was no longer possible to 
speak of a central public treasury unless by this the Bank 
was meant. There was nominally no official of the old 
receipt side of the Exchequer remaining. Its functions 
were, however, partly exercised by the comptroller-general, 
who, indeed, retained the name of the original central 
authority for administering public money and accounts — 
the Exchequer — although he was only ''a sort of shadow 
of the Ancient Exchequer." The audit office had long 
ago been separately constituted, and now the Exchequer, 
as an office for managing the public money, disappeared. 

a "Report on Public Monies," 1856, Ap. i, p. 476. 

196 



The English Banking System 

It continued merely as a bookkeeping office for the con- 
trol of the Treasury, the position and further develop- 
ment of which are connected with those of the audit 
office which will be dealt with below. « 
(j) Reforms in organization and administration between 

i8s4 and iS66. 

The act of 1834 gave legal recognition to the principle 
that all public money should be intrusted to and adminis- 
tered by the Bank until it was actually expended. This 
plan had already been adopted in practice, so that there 
was a positive advantage in the resulting abolition of the 
Exchequer. The consequences which might have followed 
from a complete reorganization of the system of making 
payments were not entailed. The evils of earlier times 
were only in part removed. The receivers paid in their 
net receipts only. The issues were still managed as 
before by a division of the money among numerous special 
offices, each of which was authorized and, indeed, obliged 
to keep a large balance in its account in order to meet 
the current claims for payment. The receivers were 
under the control of the Treasmry. The issue offices were 
supervised by their respective administrative authorities. 
The comptroller-general controlled only the net public 
revenue and the payments made from this in lump sums 
to the numerous pay offices, which sums had been assigned 
to the different services by parliamentary vote. 

But a basis was now secured from which the whole 
system of expenditure might be simplified, an economical 
use of the cash balances might be made, and a single 

« The name "Exchequer" is still always used to denote a nominal con- 
centration of the public revenues. The expressions, issues from the Ex- 
chequer, loans to, and payments into the Exchequer, are still always used. 

197 



National Monetary Commission 

effective control be maintained. Reforms aiming at 
these results were in fact carried out zealously during 
the next decades, and especially by parliamentary 
activity. When the Bank undertook the entire adminis- 
tration of the public money, all the technical advantages 
of banking were placed at the disposal of the Government ; 
hence the question naturally was how to use this connec- 
tion with reference to the aims specified above. For this 
purpose the essential requirement was to centralize the 
system of payments as far as possible, so as to give to the 
Treasury and audit office the necessary check on the 
position of the finances. This task was accomplished 
by various acts of Parliament and orders, which form 
the transition to the present system. 

The consolidation in 1836 of the pay offices of the pay- 
master of the forces into the single office of the paymaster- 
general was the first step toward a consolidation of the 
system of issues. The abolition of the paymasters of the 
civil services and of the exchequer bills in 1848 and the 
transference of their functions to the paymaster-general 
completed this process. All issues for administrative 
purposes were concentrated in one hand. The functions 
of this consolidated pay office were regulated by treasury 
minutes, not without opposition on the part of the comp- 
troller-general.^ 

(^ The most important of these treasury minutes printed in the "Report 
on Public Monies," 1856, Ap. I, p. 491 et seq. are those of Aug. 19, 1836, and 
Nov. 19, 1836, on the consolidation of the separate pay offices of the 
paymaster of the forces, and of Dec. 22, 1848, by which the abolition of 
the remaining special offices and the final regulation of the head pay office 
were accompHshed. Lord Monteagle, the comptroller - general, raised 
objections to the latter minute on the ground that it concentrated the 
public monies in the hands of the paymaster-general and allowed him 
to apply it at will to the different public services. 

198 



The English Banking System 

Whereas hitherto the pubUc money had been trans- 
ferred from the exchequer account to those of the dif- 
ferent paymasters, in accordance with the demands 
which the latter made to the comptroher-general through 
the Treasury, now only the account of the paymaster- 
general was supplied from that of the Exchequer. The 
more the issue accounts were divided and the more 
completely the payments from the Exchequer were sepa- 
rated, so much the more readily could the comptroller 
follow the course of the payments. Thus in the civil 
service the practice had hitherto been followed of open- 
ing an account at the Bank for every separate vote of 
Parliament. The balance standing to the credit of one 
account might not be used for payments which had to 
be entered under a different vote. Thus a check was at 
once put upon any misapplication of the money. When 
the consolidated pay office was created, however, this 
useful system was not only extended no further, but was 
completely done away with. The gain in simplicity and 
distinctness seems the less valuable owing to the loss of 
any method of checking the assignment of money, that is, 
so far as a strict subsequent control does not render the 
earlier check superfluous. Th^ development of this 
branch of the system of control since the institution of 
the commissioners of audit in 1785 must be briefly de- 
scribed here in order to make what follows more com- 
prehensible. 

The commissioners of audit succeeded to all the official 
duties of the auditors of imprest. They were subjected 
by law "to the same control to which the auditors of the 
imprest were then subject or liable by law, usage, or 



199 



National Monetary Commission 

custom." And by their patent they were empowered " to 
audit and determine accounts by and with the advice, 
authority, and consent of the Lords of the Treasury and 
Chancehor of the Exchequer." Thus they were entirely 
dependent on the latter, except in so far as their functions 
might be widened by law. This happened as early as 
1799 when, by 39 Geo. Ill, c. 83, the auditors of the 
land revenue were discontinued, and their powers trans- 
ferred to the commissioners of audit. ^ In the following 
year their powers were still fmrther increased. ^ but this 
audit had always one great defect ; it was not independent 
and did not extend over the whole of the public expendi- 
ture. 

2 Will. IV, c. 40 marked the beginning of changes of a 
different type. This act transferred to the auditors the 
detailed audit of the navy accounts on such terms that 
they not only checked the actual payments but also the 
correspondence of these with the parliamentary vote. 
This was the appropriation audit, the audit whose object 
it was to ensiu'e that the money was spent according to 
the appropriations made by Parliament. It marks the 
transition from a system of administrative to one of 

c^ In consequence of reports issued by select committees from 1792 on- 
ward, with regard to the position of the finances and especially to the 
system of public accounts. See in particular the report in 1797 on audit- 
ing the accounts of the public receipt and expenditure. "Reports of 
Committees of the House of Commons," A^ol. XII, Rep. 22. [The Reprints 
of 1803, 16 vols., fol.] 

& By 39 and 40 Geo. Ill, c. 54, they were empowered to recover balances 
due to the public accountants after the accounts had been audited, and to 
charge interest in case of delay. 45 Geo. Ill, c. 91 and c. 141, regulated the 
technical procedure of the audit; by 2 and 3 Will. IV, c. 26, the audit 
of the colonial accounts, and by 2 and 3 Will. IV, c. 99, the audit of the 
Irish accounts were entrusted to them. 



200 



The English Banking System 

legislative control. The latter, however, was still very 
limited. The auditors had no connection with Parlia- 
ment and could not express their opinion publicly about 
abuses, but only through a memorandum to the Treasury. « 

The total expenditure was of course subjected to that 
control which, since the abolition of the public treasury 
and the transference of its functions to the Bank of 
England, had been vested in the comptroller-general. 
But this afforded no satisfactory check on the applica- 
tion of the money voted by Parliament and thus had to 
be extended by the appropriation audit of the auditors. 
This was itself unsatisfactory in its existing form. The 
remaining ofhces on the account side proved themselves 
more and more superfluous in connection with the growing 
functions of the commissioners of audit. The accounts 
of the clerk of the pipe might be replaced by the books 
kept by them and by the comptroller; the associated 
offices might be simplified. This was accomplished by 
3 and 4 Will IV, c. 99, which abolished all head and 
subordinate offices on the account side with the exception 
of that of the King's remembrancer, so-called,. which was 
united with the Court of the Exchequer. 

During the following years all attempts at reform 
were directed toward extending the audit and making 
it more efficient, while at the same time improving the 
system of accotmts. The powers of the auditors were 
increased by 10 Vict., c. 92, which act introduced the 
appropriation audit into the departments of the War 
Office and Ordnance. In 1849 they were empowered to 

tt Report of the Audit Office on "The Functions of the Committee of 
Audit," 1851, in "Report on Public Monies," P. P. 1858, 375, p. 836. 



201 



National Monetary Commission 

present a yearly return to Parliament of the appropria- 
tion audit. ^ Bookkeeping by double entry was gradu- 
ally introduced ^ and the whole system of account keeping 
and audit was subjected to a detailed inquiry.^ Two 
tendencies become evident from this. From the tech- 
nical standpoint the aim was to simplify both the offices 
and their functions and to secure a proper exercise of 
the latter; but from the legal and political standpoint 
the aim was to strengthen the control of the Treasury 
and to combine this with the right of Parliament to 
control the application of the public money. 

English parliamentary history contains instances, dat- 
ing back to the earliest times, of the exercise of parlia- 
mentary control over expenditure.^ The numerous com- 
missions of inquiry and interpellations of ministers supply 
a continual series of assertions of this right during the 
eighteenth century. But no fundamental conception 

« "Treasury Minute," Apr. 13, 1849. 

& "Treasury Minutes," Sept. 26, 1834, Aug. 19, 1836, May 9, 1837, Aug. 
22, 1848; "Report on Public Monies," P. P., 1856, 375, p. 476 et seq. 

cin addition to the twenty-second report of the finance committee of 
1797 the following reports for the earlier period should be noticed: The 
fifth report of the committee of 1810 (P. P., 371), the tenth report of 
the committee of 181 1 (P. P., 253), the fifth report of the committee 
of 1 8 19 (P. P., 539), the evidence before the committee of 1821 (P. P., 
284). Further: for the naval and military accounts, P. P., 1856 N. 160; 
for the whole system of public accounts and public money the "Report 
on Public Monies," 1856 N. 375 and 1857 N. 279, and, finally, the yearly 
reports of the select committees on public accounts since 1861. 

<^The earliest instance was in 14 Edw. Ill (1340). William de la Pole 
and John Charnels were summoned to appear before certain persons 
specified by Parliament and present accounts of their receipts and expen- 
diture (Hatzell "Precedents," vol. 3, p. 72). Richard II appointed a 
commission in 1380, at the request of Parliament, and authorized it " exami- 
nandi et supervidendi quascunque summas et modum expensarum ac 
statum hospitii nostri" (Rymer's Foedera, " Vol. VII, p. 250). These 
instances become much more numerous during the succeeding years. 



202 



The English Banking System 

of a control extending over the entire management of 
the public money was attained until the middle of the 
nineteenth century, just as it was only in this century 
that the whole administration of finance began to be 
organized on one definite principle. Parliament, when 
it has secured complete power over the public revenue 
and expenditure, ought also to control the administration 
of this money. But since it can not undertake this 
itself, the controlling authority must be made entirely 
independent of temporary governments and put into 
direct connection with Parliament. « 

This was the state of the system of control when, 
owing to the consolidation of the pay ofiices and the 
problems connected therewith, Parliament had the oppor- 
tunity to make a thorough investigation. In 1856 and 
1857 the organization of the receipts, issues, and audit 
was carefully examined by the committee on public 
monies. The chief object was to solve the problem 
connected with the consolidation — i. e., to determine 
in what way this concentrated pay office could be sub- 
jected to an effective control. Owing to its history, 
the Exchequer, or rather the comptroller-general who 

c^ These ideas are most clearly expressed in the "Observations" by the 
comptroller-general, prepared at the request of the select committee on 
public monies in 1857, on the "Memorandum on- Financial Control," 
by the chancellor of the exchequer laid before the committee in the same 
year. The comptroller states: "I deny that such confidence in the Execu- 
tive Government is, has been, or ought to be recognized in any free State. 
On the contrary, it is constitutional jealousy and not confidence upon 
which our institutions are founded and on which the safety of the liberties 
of England depends. * * * The Comptroller-General of the Exchequer 
is an officer of the Crown, but he is also, most wisely, made responsible (4 
Will. IV, c. 16, s. 2) to both Houses of Parliament. On the maintenance of 
this principle the very existence of our constitution depends." "Report 
on PubUc Monies," P. P., 1857, 279, pp. 67, 68. 



203 



National Monetary Commission 

had replaced it, already, in relation to the assignment 
of money, checked the legality of the payments made 
in consequence of this assignment. So long as the Ex- 
chequer was still the public treasury this check was 
simple and natural. But after the transference of the 
public money to the Bank, and the formation of the 
single financial office of the paymaster -general, the power 
of the Exchequer was limited to the opening of accounts 
at the Bank, and the actual payments were made outside 
its sphere of observation. If its control were still to 
extend over these latter, the facility with which pay- 
ments could be made must be thereby lessened. The 
most important opponent of control through the Ex- 
chequer has stated these contradictory demands in 
expressing his adverse judgment: **The worst part of 
the Exchequer system is the attempt to carry out a scheme 
of separate Exchequer Credits upon hundreds of heads 
of service through the daily operations of cash, instead 
of confining the credits, as the French do, to the annual 
votes or " Legislative credits. " The breaking up of annual 
votes into daily credits with a specific appropriation of 
each daily credit, which must not be extended, would be 
fatal to simplicity and regularity of payment and account, 
even if the plan could be carried out in practice. "® 

In answer to the just complaints about the financial 
administration, which were made by the controlling- 
authority, viz, that it disregarded the appropriation made 
by Parliament, that it permitted illegal application of 
money and even allowed payments for purposes not 

a W. G. Anderson, principal clerk of the financial business of the Treasury, 
in his "Remarks" on Lord Monteagle's "Memorandum on the Exchequer," 
1854, "Report on Public Monies," 1856, Ap. i, p. 560. 

204 



The English Banking System 

sanctioned by law,® the main argument was that no control 
ah ante could prevent such abuses. The result was that 
the positive proposals made by the select committees of 
1856 and 1857^ were to leave to the comptroller-general, 
as before, the control of the general assignments, but in 
addition to appoint officers under the commissioners of 
audit for each department of the public service, who 
should check the daily payments of the department and 
report on any irregularities. Moreover the accounts of 
the public departments were to undergo an additional 
examination and two accoimts were to be submitted to 
Parliament: the finance accounts, which were merely 
an unaudited statement of the receipts and issues of the 
Exchequer, on the part of the Treasury, and the appro- 
priation accounts — i. e., public accounts based on an 
examination and checking of the actual expenditure. 
These proposals were carried out in 24 and 25 Vict., c. 93; 
28 and 29 Vict., c. 93, and 29 and 30 Vict., c. 39, and form 
the basis of the present system of accounts and audit. ^ 
The position of the pay offices remains undisturbed thereby,^ 
and the control is in principle satisfactory. 

« Thus in the year 1852-53 a contract was concluded by the Admiralty 
for the cession of the patent for a ship's screw for £10,000. This sum was 
paid out of one of the grants for the civil service. It was not included in 
the estimate until 1853-54 when the money was refunded out of this vote. 

& "Report on PubHc Monies," P. P., 1857, 279, p. 3 et seq. 

cBy 54 Vict., c. 24, the Treasury was authorized to apply charges and 
fines paid into the Exchequer to services for which notes had been granted, 
subject, however, to the subsequent approval of Parliament. 

(i "Report on Public Monies," P. P. 1857, 279, p. 3 et seq. "Your com- 
mittee are satisfied, from the evidence taken before them, that the consoli- 
dation of the Pay Departments has been attended with public benefit ; 
that it has diminished the balances left in the hands of the public account- 
ants to the crown; that it has increased the security of public money and 
promoted economy." 



205 



National Monetary Commission 

Next to the consolidation of the pay departments the 
organization of the payments of the revenue departments 
has been the most important step taken since 1834 with 
regard to the administration of public money. The sys- 
tem which had prevailed in earlier times of earmarking 
different heads of revenue for specific purposes was 
adhered to for many payments until the middle of the 
nineteenth century .« Hence the revenue coming into the 
Exchequer was diminished not only by the expenses of 
collection and management but also by those payments 
which, owing to this system, were not checked by the 
comptroller- general before they were made. The com- 
missioners of 1 83 1 had already recommended ''that the 
gross receipts of public money from any sources should 
be placed without deduction in the custody of the Ex- 
chequer and be accounted for to Parliament, whose au- 
thority should be necessary for the appropriation of the 
whole. "^ This proposal was, however, with the exception 
of minor provisions,^ not carried out until 1854 when 
Gladstone caused an act to be passed dealing with the 
matter. By 17 and 18 Vict., c. 94, all payments still 
charged upon certain specified branches of revenue were 
transferred to the consolidated fund. Although it was 
not stated in the act, the necessary consequence was that 

« A list of the payments made directly through the revenue departments 
is given in Schedules A and B of 17 and 18 Vict., c. 94. 

fc "Report on Exchequer," P. P., 1831, 113, p. 4. 

c By a treasury minute of May 2, 1848, the custom of the army and navy 
departments of deducting from their yearly claims the sum received from 
the sale of old stores was discontinued. The receipts were transferred to 
the Exchequer and the expenses stated fully. By 14 and 15 Vict., c. 42, it 
was enacted that the costs of managing public property should be provided 
by Parliament. 



206 



The English Banking System 

now the gross revenue of the State was paid into the 
Exchequer, through which all payments had to be made. 
But to pay in actually to the exchequer account at the 
Bank, the revenues raised throughout the country, and to 
pay them out again to the collectors or other local officials 
(agents, commissioners) to meet local expenses, would 
have been exceedingly difficult and fatal to an economical 
administration. The object in view was merely to place 
all receipts and all issues under a central control and under 
Parliament, which latter must secure a knowledge of the 
total payments from the public accounts which were based 
on the exchequer accounts. Only in bookkeeping was it 
necessary that all the receipts should be paid into the 
Exchequer, and all payments be made from it. 

It was with this aim that the payments of the revenue 
departments were regulated by the treasury minute of 
August 22, 1854.^ The minute distinguished between pay- 
ments and advances. The former are, as before, deducted 
from the sum to be paid into the Exchequer; the latter 
are partly expenses of management, partly expenses for 
other public departments, which have to be returned to the 
revenue departments, and are paid in to the Exchequer as 
part of the receipts. 

The ''exchequer and audit departments act 1866" 
(29 and 30 Vict., c. 39) ^ provided a definite organization 
for the system of receipt, issue, and audit. Section 10 
provided expressly that the total gross revenue shall be 

a "Report on Public Monies," 1856, Ap. 2, p. 578. 

& The act is entitled; " An Act to consolidate the Duties of the Excheq- 
uer and Audit Departments, to regulate the Receipt, Custody, and Issue of 
Public Monies, and to provide for the Audit of the Accounts thereof." 
Supplemented by the Public Accounts and Charges Act, 1891, 54 Vict., 
c. 24. 

207 



National M on et ar y Commission 

paid into the exchequer account, a rule hitherto only 
applied indirectly through the charging of all expenditure 
to the consolidated fund. At the same time the revenue 
departments retain their right to advance money, for 
themselves and on behalf of other departments, to be 
repaid subsequently. As regards the management of the 
issues it is stated as a principle that the moneys paid into 
the exchequer account are to form one fund in the books 
of the Bank. Without prejudicing the control exercised 
by the comptroller -general in reference to the separate 
assigments, the Treasury is authorized to check the 
issues and to restrict to the money required for making 
current payments the sums transferred to the paymaster- 
general and by him to the different departments. Thus 
the rule, which had been followed in the management of the 
public money since the beginning of the century as the 
chief axiom of an economical system, was now legally 
recognized. 

The right of assignment and the manner of using it 
remained unaltered. The act itself distinguished between 
the right of disposing (i) of the issues for supply services 
(s. 14) and (2) of the credits for the supply services 
(s. 15). The Treasury obtained a right to the former on 
royal order, and to the latter on the authority of the 
ways and means act. The procedure was that already 
described. 

The system of audit was fundamentally altered, the 
office of comptroller-general being united to that of the 
chairman of the commissioners for auditing the public 
accounts. The office thus constituted, that of the 
''comptroller and auditor-general," resembled that of the 

208 



The English Banking System 

president of the highest court of audit in a continental 
country. He and his deputy held their offices ''during 
good behavior," and could only be removed by the Crown 
on an address from both Houses of Parliament. They 
might hold no other office nor be members of either 
House of Parliament. The comptroller-general organized 
the internal arrangements of his department and, in con- 
cert with the Treasury, prescribed the accounts and books 
to be kept in each department of the public service. 

The centraHzed bookkeeping managed by the comp- 
troller-general was abolished. But all the departments 
paying money into the Bank had to send accounts of 
these payments to the comptroller-general, who also 
received a daily return from the Bank with regard to the 
exchequer account, made out in the form prescribed by 
the Treasury. These enabled him to learn the position of 
the total finances and helped to form the basis of the con- 
trol which he exercised. 

The auditor-general exercises a double control: 

(a) The sums voted for the annual supply services are 
placed at the disposal of the Treasury by the Bank upon 
his authority alone; and only by his instructions may 
the Bank advance money to meet a deficit. 

(6) He also exercises the controlling functions which 
belonged to the auditor, and in an extended form. He 
audits all the accounts of the public expenditure "on 
behalf of the House of Commons" (s. 27). He audits 
the accounts of the receivers only so far as the Treasury 
assigns him this duty. He has access to all documents 
relating to the accounts. He examines firstly whether 
the assignment was correct; secondly, whether the pay- 

68299° — II 14 209 



National Monetary Commission 

ment thus assigned has been made, and, thirdly, whether 
it was in accordance with the appropriation. The ac- 
counts of the civil service are audited each year in detail. 
Those of the army are too complicated, and hence only a 
test audit is made by which in each year about one-sixth 
of the total expenditure is checked in detail.^ Every year 
he prepares an appropriation account over the actual pub- 
lic expenditure, compares it with the sums voted, and lays 
it, together with his own comments, before Parliament. 

II. THE BANK AND THE ORGANIZATION OF THE PUBI.IC 

DEBT. 

The administration of the English public debt during 
the eighteenth century acquired its distinctive character 
from a variety of causes. The creation of the com- 
panies through the incorporation of debt; the varying 
share taken by them in its administration; the creation 
of a special form of debt through the exchequer bills and 
the various forms of ay loannnuits; and the growth of 
the public debt itself, all contributed to this. During the 
nineteenth century, on the other hand, no new feature 
was added to the character already formed. Two points 
should be noticed with respect to the growth of the 
English public debt during this century — on the tech- 
nical side the ever-increasing connection with the Bank 
of England; and, as regards the actual administration, 
the endeavor to take in hand seriously the problem of 
redemption. The eighteenth century witnessed the for- 

a " Minutes of Evidence Taken before the Committee Appointed to 
Inquire into the System of Military Account and Estimate in India," 
1880. Evidence of R. E. Welby, assistant financial secretary of the treas- 
ury, on the procedure in England. 



310 



The English Banking System 

mation of the enormous English debt; the nineteenth 
century marked the beginning of its systematic repay- 
ment. There were no fresh issues until at the beginning 
of the 2oth century — due to the South African War and 
the China Expedition. 

The history of the administration of the English public 
debt so far as the peculiar character of its technical 
organization is concerned, really ends with the eighteenth 
century. The further developments are only the results 
of the principle established in the course of this hundred 
years. They are merely applications of one fundamental 
idea to new cases. Hence our account may here be brief, 
and the more so since the most important part of the 
history of the English debt during the nineteenth century, 
viz, the account of its redemption, falls outside of the 
scope of a work which is concerned only with the admin- 
istration of the debt through the Bank.^ 

In consequence of the French war the English Govern- 
ment was continually forced to raise loans; both funded 
and unfunded debt increased to an enormous extent from 
1790 onward into the first decade of the nineteenth cen- 
tury. It was obvious that it was impossible under the 
circumstances to think seriously of breaking the connec- 
tion with the Bank of England and handing over the man- 
agement of the public debt to, say, the South Sea Company, 
as was proposed in 1797. The Bank was indeed the most 
effective support, of public credit at this time, being always 

« For an account of the redemption see Leroy-Beaulieu, " Traite de la 
science des finances," Vol. II, Bk. II, ch. ix. This account, however, 
is incomplete in regard to the history of the different sinking funds. (See 
also Report by the Secretary and Comptroller-General of the Proceedings of 
the Commissioners for the Reduction of the National Debt, from 1786 to 
Mar. 31, 1890, 1891, C. 6539.) 

211 



National Monetary Commission 

able to supply the needs of the Government either from 
its own resources, or by acting as an intermediary for others. 

The South Sea Company decreased in importance and 
subsisted on the remnants merely of its early significance. 
Its administration of the £20,000,000 of debt intrusted 
to it continued into the nineteenth century. No further 
sums were borrowed from it. The debt still owing to it 
was diminished by frequent repayments, so that by 1853 
it was reduced to £9,000,000. Finally in this year Glad- 
stone brought forward a project to pay off this debt alto- 
gether, or rather to transform it into an annuity -bearing 
debt under the management of the Bank. More than 
£7,000,000 was paid back in cash to creditors who would 
not agree to the project, the rest was converted, partly 
into 2% per cent annuities, partly into a debt created by 
the same act (16 Vict., c. 23)- — the exchequer bonds. 
Neither was redeemable by the State until 1894. ^^'^ 2> 
per cent consols were converted into 2^ per cents from 
April 5, 1889, by Mr. Goschen, and into 2}4 per cents from 
April 5, 1903. Three large issues of consols were made at 
the beginning of the twentieth century, owing to the Boer 
war and the China expedition. Since the end of the 
eighteenth century the Bank had continually acted as 
intermediary in raising loans for the Government, and the 
total public debt administered by it amounted to nearly 
£800,000,000 at the conclusion of the French war. Thus 
all external motives for depriving it of this function had 
now completely disappeared and it has since continued 
undisputed administrator of the public debt. 

Since 1750 the government debt to the Bank had, with 
the exception of a temporary loan (18 16) which was soon 



212 



The English Banking System 

repaid, only undergone one alteration: In 1834, £671,700 
had been paid back, so that it now amounted to £1 1,01 5,- 
ioo.« The interest was paid out of the permanent annual 
charge for the National debt.^ The government debt to 
other creditors, administered by the Bank, was reorganized 
many times, but the same work was required from the 
Bank after these changes as before; it raised fresh loans, 
opened books for the public creditors, paid the interest, 
redeemed the capital, arranged for the exchange of bonds 
when there was a conversion, etc. These duties were 
much simplified when the public treasury was united 
with the Bank. The earlier assignments from the Ex- 
chequer to the Bank and from the Bank to the Exchequer 
became simple transfers from one account to another. 
The transference to the Bank of the management of the 
public money had besides much influence in increasing 
the Bank's share in the administration of the debt. No 
further demand was made for any alteration in this akeady 
existing connection. The intrusting of an important 
part of the management of public expenditure to private 
corporations must have been regarded in earlier times as 
a peculiarity in financial administration, but this man- 
agement naturally formed part of the duties taken over 
by the Bank when the latter assumed entire administra- 
tion of the public money and of the payments connected 
therewith. Thus the Bank secured a monopoly of the 
administration of the funded debt. This connection, 
according to English custom, has never been stated as a 

o [In 18 1 6 the Bank advanced a further £3,000,000 at 3 per cent, making 
the total debt £14,686,800. In 1834 one-quarter was paid off, i. e., 
£3.671,700, leaving the debt as now £11,015,100. Cf. the Report of 1891, 
p. 93-— H. S. F.] 

650 Vict., c. 16. 

213 



National Monetary Commission 

principle, but has frequently been confirmed in individual 
cases. Hence the administration of the public debt has 
become so closely bound up with the Bank by the nature 
of the system of public finance and by tradition, that the 
connection may be regarded as permanent. 

No change has been made during the nineteenth cen- 
tury in the methods of borrowing or in the administration 
of the funded debt. The steady redemption of the latter 
is the only feature of importance to notice. But through 
alterations in the organization of the unfunded debt the 
sphere of the Bank's influence has been extended in this 
direction also. 

The unfunded debts of the eighteenth century were of 
two kinds : the bills and debentures of the various depart- 
ments of the public service, forming special debts of each 
department respectively, and the exchequer bills and loan 
debentures issued by the Treasury and representing the 
debts of the Government. We have already pointed out 
that, owing to the development of an organized system 
which involved the appropriation of separate sums for the 
separate departments of the public service, the former had 
become simple book debts of the department issuing them, 
and merely entitled the creditors to receive a payment 
warrant. As the whole administration of the public 
money took on the form proper to payments made by 
private individuals, the public money was intrusted to the 
Bank, and the payments were made by the Bank on orders 
from the public authorities. Consequently the bills and 
debentures issued by the latter also lost their original charac- 
ter and became bills of exchange through which the admin- 
istrative authorities of the time, whenever it seemed to 



214 



The English Banking System 

them impossible to pay cash, referred the person making 
the claim either to the Treasury, the paymaster- general 
or the Admiralty. The bill was then accepted and handed 
over to the Bank to be cashed. « 

The loan debentures, which were issued by the Treasury, 
never amounted, in 1813, to as much as a million at any 
time and, when these were repaid in 18 16, disappeared 
entirely from the history of the English debt.^ But the 
raising of money by exchequer bills continued to be the 
method usually adopted by the Government and of which, 
often, excessive use was made. 

The methods of issuing, of cashing, and of paying 
interest on the exchequer bills and the claims arising out 
of them, were determined by 48 George III, c. i, (1808) — 
that is, the provisions which had hitherto been repeated 
in each act of Parliament which authorized the issue of 
exchequer bills were now permanently embodied in one 
special act. ^ But this act placed the Bank in no specially 
favored position. It was still left to the Treasury, as in 
the case of the first Exchequer Bills act, "to enter into 
any contract or contracts for obliging any Person or 
Persons, Body or Bodies Politick or Corporate, to circu- 
late and exchange at some Publick Office in London or 
Westminster for ready Money all such Bills as shall be 
demanded, ^ * ^ " for which service an indemnity was 
to be paid. But immediately afterwards, with a clear 

<^See below p. 248. Fairman, loc. cit., p. 155, speaks of the navy bills as 
early as 1794 as "being negotiated as bills of exchange." 

^ Fairman, loc. cit., p. 147. "Ret. Nat. Debt," p. 42 et seq., "Ret., Publ. 
Inc. and Exp.," II, p. 547. 

c An act for regulating the issuing and paying off of exchequer bills 
" Whereas it is expedient that permanent Regulations should be estab- 
lished in relation to the making out" etc. 



215 



National Monetary Commission 

reference to the custom hitherto followed of making these 
contracts with the Bank, it was stated that the governor 
or directors of the Bank of England should not be debarred 
from sitting in Parliament if they made such a contract 
with the Government "on Behalf of or for the Benefit of 
the Governor and Company of the Bank of England." 
As before, the exchequer bills must be received in pay- 
ment of taxes and bore interest reckoned at so nmch 
per cent per diem. 

A new form of floating debt came into existence, side 
by side with the exchequer bills, at the end of the eight- 
eenth century, viz., treasury bills of exchange, issued by 
the Treasury. The opposite thing happened here to what 
was the case with the navy bills, ordnance debentures, 
etc. The latter became mere book debts when the man- 
agement of the public money was so organized that the 
total issues of the public departments concerned were 
completely covered by the total revenue assigned to them. 
The government bills, on the contrary, so long as they 
were only used to meet expenses covered by the receipts, 
were regarded merely as a special form of payment, but 
they became unfunded debt in cases where they were not 
covered by the ordinary receipts. Even in the last decade 
it had become an established custom of the Government 
in case of need, to draw bills of exchange on the Bank of 
England, which were honored by the latter to the amount 
of £20,000 or £30,000. This accepted maximum for the 
current bank loan rose to £50,000 in 1793. It is well 
known how these advances to the Government, which 
increased in December, 1795, in connection with the loan 
on security of exchequer bills, to nearly £13,000,000, 



216 



The English Banking System 

prepared the way for the crisis of 1797 and the consequent 
restriction of cash payments. Definite regulations con- 
cerning the credit to be obtained by the Government from 
the Bank were not, however, issued until 18 17 and 18 19. 
The provisions contained in the act of 181 7 we have 
already noticed in another place; they led up to the pro- 
vision of a satisfactory cover for the cash deficit. By 
59 George III, c. 76, the Bank was forbidden, except in 
case of a mere book deficit, to advance any sum to the 
Government on the security of exchequer bills, treasury 
bills, or other similar security, without the express consent 
of Parliament. In case of need the first lord of the treas- 
ury or the chancellor of the exchequer must present a 
written request to the Bank, and a copy of this as well as 
of the answer of the Bank must be laid before Parliament. 
In addition it was provided that statements of all advances 
made, and of all the exchequer or treasury bills purchased, 
must be presented to the House of Commons. From this 
time onward the government bills of exchange — i. e., the 
treasury bills — represent unfunded debt, which must be 
voted by Parliament, and which is used, like the exchequer 
bills, as an exceptional source of revenue. The latter, in 
so far as they served this object, and to distinguish them 
from the deficiency and ways and means bills, were called 
*' supply bills," since they were used to cover the expendi- 
ture voted annually, the supplies. 

A new form of loan, which must be regarded sometimes 
as funded and sometimes as unfunded debt, was created 
in 1853, when the South Sea Company was dissolved and 
a portion of the debt to it was converted into negotiable 
bonds. These, called "exchequer bonds," could be re- 



217 



National M on et ar y Commission 

deemed by the Government, bore interest at 3^ per cent 
until 1864, and afterwards at 2^ per cent, and ran until 
1894. In the National Debt and lyoan Act (50 Vict., c. 16) 
arrangements were made for the interest, by way of ex- 
ception, to be included in the permanent annual charge 
for the national debt; the irredeemable capital of these 
bonds was thus included in the funded debt. Since then 
there have been repeated issues of similar bonds running 
for short periods previously determined, and which must 
be counted as floating debt on account of their short 
duration. Thus, since 1853 there have been three forms 
of unfunded debt — treasury bills, exchequer bills, and 
exchequer bonds. The nature of these bills has been de- 
termined in modern times by three acts of Parliament — 
29 Vict., c. 25 (1866), 40 Vict., c. 2 (1877), and 4 Ed. 
VII, c. 21 (1904). In 1866 the exchequer bills and bonds 
were regulated; in 1877 the treasury bills; in 1904 spe- 
cial regulations were made for the exchequer bonds. The 
following are the essential provisions of the acts : ^ 

The treasury bills resemble bills of exchange; they are 
either payable to order or to bearer, they are made out 
for a definite sum, and must be cashed within twelve 
or, at the outside, fifteen^ months of the day of issue. 
They bear no fixed interest but are subject to such dis- 
count as may be agreed upon between the person receiving 
them and the Government, when they are issued. 

The exchequer bills entitle the holder, or, if they are 
made out in some one's name, the person in whose favor 

a The forms in which these bills are issued are given in a treasury minute 
of Mar. 16, 1877, for the treasury bills, and a treasury minute of Mar. 9, 
1867, for the exchequer bills and bonds. See Appendix III. 

& Three months after the end of the financial year. (7 Ed. VII, c. 20.) 



218 



The English Banking System 

they are issued or his order, to the payment of the sum of 
money stated in the bill together with all outstanding 
interest, at any date after twelve months and within five 
years from the day of issue. The interest is not stated on 
the bill, but is announced by the Treasury in the lyondon 
Gazette every quarter, for the succeeding quarter. It never 
exceeds 5^ per cent on the nominal capital. These bills 
have a special value in that they may be used for the pay- 
ment of taxes in the second half of any year commencing 
from the day of issue. « 

The exchequer bonds are payable to bearer and are 
issued for a round sum, which must be repaid within six 
years of the date of issue. ^ The interest is paid on pres- 
entation of the coupons attached to the bonds. ^ 

The same acts transferred the preparation and issue of 
these bills, which had hitherto been managed by the 
Exchequer or, after its abolition, by the comptroller- 
general, to the Bank. This arrangement had been pro- 
posed as early as 1857 ^7 the then chancellor of the 
exchequer, ^ but was not immediately carried out. The 
transference of these duties to the Bank in 1866 and 1877 

fl^The limitation in the use of exchequer bills for the payment of taxes 
dates from i Vict., c. 26, 1838, which provides that they may not be so used 
until a year after their issue. 

& 57 Vict., c. 27, orders that: Where an act authorizes any sum to be 
issued out of the consolidated fund of the United Kingdom towards making 
good the supply granted to His Majesty for the service of any year, every 
sum issued in pursuance of that act shall be applied towards making good 
the supply so granted at the time of such issue. 

c On two occasions, after the South Sea Company was dissolved, ex- 
chequer bonds of longer date were issued, by 39 Vict., c. i, for the pur- 
chase of the Suez Canal shares, which bonds run till 19 12, and by the naval 
works act, 5 Ed. VII, c. 20, by which annuities running till 1925 might 
legally run for a period of thirty years from the date of borrowing. 

d "Report on Public Monies," 1857, 279, Ap. i. p. 43. 



21Q 



National M o n et ar y Commission 

completes the list of public functions which it can per- 
form. It now undertakes the entire business of a central 
public treasury and administers the funded and unfunded 
debt, and there remains no branch of public financial 
administration in which it is not the center or starting 
point of all activities. 

PART IV. 

TKJi PRESENT POSITION OF THE BANK AS THE FINANCIAL 
SERVANT OF THE STATE. 

We have attempted in what precedes to show how the 
principle of an administration of public money by the 
Bank has been evolved. In what follows we shall describe 
how this principle works in practice at the present day, 
how the important departments cooperate under its guid- 
ance, and how transfers of money, assignments, and issues 
are carried on. We shall, however, only consider this 
process in so far as the Bank of England forms its center. 
The almost complete centralization of all public payments 
in lyondon, and the direct hold of the Bank on the process of 
payment, lend an importance to the central organization 
of public financial administration in England such as it 
possesses in no other country. One characteristic of the 
English financial administration, which is only explicable 
by the peculiar nature of the administrative organization, 
and is only possible owing to the part played by the Bank, 
is that the public revenues, without being collected in 
provincial treasuries, are transmitted direct by the receiv- 
ers to lyondon after local expenses have been met. The 
Bank of England thus actually receives the surplus cash 
of all the revenue departments. And it is a peculiarity of 



220 



The English Banking System 

the method of pubHc payments that the greater part of 
the budget is paid in London itself, and that for expenses 
which have to be met outside London, and which can not 
be paid by the receivers, the money is always remitted 
from London. This appears to be a disadvantage, but 
through the intervention of the Bank it becomes perfectly 
simple. In any case the result is that the most important 
part of the management of the money is in the hands of the 
central authorities. 

The Treasury, the center of the whole financial system, 
naturally stands at the head of the administration of the 
public money. Its function and especial duty is to insure 
the accurate balancing of the financial system — i. e., to 
secure a constant correspondence between the receipts and 
issues. Like the head of a large business firm it must 
continually balance the current receipts against the liabili- 
ties of the State, and must take care that the former are 
ready in hand to meet the latter. Hence it keeps in touch 
with the position of the public assets at the Bank and with 
the claims which present themselves, and disposes accord- 
ingly of the balance at the Bank. The comptroller and 
auditor-general cooperates with it, acting as a constant 
check. To carry out the Government's obligations in 
detail is the ,duty of the public offices. But these have no 
direct connection with the Bank, on the contrary the pay- 
master-general stands between them and the Bank, and 
satisfies the demands of all public offices by drafts which 
the Bank honors. The Treasury, the auditor-general, the 
paymaster-general, and the Bank are thus the authorities 
through whose cooperation public payments in and from 
London are managed. I do not propose in what follows 



221 



National M o n et ar y Commission 

to distinguish the various powers and functions of these 
authorities. I shall only give an account of the process 
by which the public revenues are daily concentrated in 
the Bank of England and thence distributed amongst the 
public services, and shall describe the simple machinery 
which is thus set in motion. 

I. THE BANK AS MANAGER OF^ THE PUBUC MONEY.« 

(i) The concentration of the public revenues in the Bank. 

Each of the head offices concerned with the adminis- 
tration of the various branches of the revenue (customs, 
inland revenue, post, and Crown lands offices) has an 
account at the Bank. All the money received by these 
offices is in the first instance credited to one of these 
accounts. Only miscellaneous receipts, which are man- 
aged by the Treasury, are paid direct to the exchequer 
account. ^ 

The procedure is simple so long as both receipts and 
expenditures take place in lyondon. Payment is made 
either to the receivers general and other receivers of taxes 
or direct to the Bank. In the latter case the Bank must 
receive a written authorization from the office.^ 

The revenue received by the collectors ^ in the provinces 
is remitted to London by means of bills of exchange, 

^The following account, except where special authorities are referred to, 
is based on R. Welby's "Memorandum," of Feb. 3, 1882, to the Swedish 
Government, and on information received on the spot. 

& With one exception ; the receiver of the hereditary revenue, which 
belongs to the miscellaneous receipts, has a separate account. 

c Minute of Sept. 25, 1855 ("Report on Public Monies," 1856, p. 587). 

d The collectors are appointed by the Commissioners of Inland Revenue, 
established by 53 Vict., c. 21. The office of Receiver General of Inland 
Revenue, instituted after the French model by the same act, was abolished 
again in the next year by 54 Vict., c. 24. 



7t22 



The English Banking System 

which are made out to the head office to which payment 
is to be made. Should there be a branch of the Bank of 
England in the neighborhood of the collector, he deposits 
his money there, and the amount is at once credited to the 
general account of the Commissioners of Inland Revenue 
in the books of the Bank. (54 Vict., c. 24.) But as 
the Bank of England has only nine branches ^ remit- 
tances are more usual. The bills run for two or three 
days and are sent to the Bank by the Commissioners of 
Inland Revenue to be cashed. When they have been 
honored the Bank credits the accoimt of the office with 
the amoimt in question. 

The Commissioners daily ^ transfer the money in hand, 
with the exception of the balance required for the next 
day, to the general account of the Commissioners of Inland 
Revenue, from which it is transferred to the Exchequer 
account. For this and for the transfers made by private 
persons under the instructions of the receivers — i. e., for 
payments into the Exchequer accoimt — special authority 
from the comptroller-general is no longer necessary. 
They are made on written assignments from the office 
concerned.^ 

Certain payments are, however, made both by the 
head offices and by the collectors before the money is 
transferred to the Bank. These payments were limited 
by 29 and 30 Vict., c. 39, s. 10, to drawbacks, repay- 
ments, and discounts. No other expenditure, expenses of 

«■ Manchester, Liverpool, Birmingham, Bristol, Leeds, Plymouth, New- 
castle on Tyne, Hull, and Portsmouth (Whitaker's "Almanack," 1883, p. 
232). 

& Minute of Mar. 2, 1855 ("Report on Public Monies," p. 583). 

c Minute of Sept. 25, 1855, "Report on Public Monies," p. 587. Gneist 
has overlooked this, cf. loc. cit., Bk. II, p. 847. 

223 



National M o n e t ar y Commission 

management, or payments on behalf of other depart- 
ments, may be permanently charged on the revenue re- 
ceipts. Hence the procedure is as follows: The expenses 
of management, which are voted by Parliament, are paid 
out of the current receipts in accordance with this vote. 
From time to time, however, the head office applies to the 
Treasury and has the sum expended out of the parlia- 
mentary vote transferred through the comptroller from 
the exchequer account. This sum is transferred back as 
receipts. When payments are made on behalf of other 
public departments the sums are transferred by the head 
office concerned, on production of vouchers, from the 
account of the office receiving the advance to that of the 
office paying the money, and thence again to the exchequer 
account as receipts. 

Suppose for example that the customs officer in A col- 
lects £i,ooo on January i. This £i,ooo must be paid 
into the exchequer account. He pays, however, £200 
toward the expenses of the customs office in A, £100 for 
the army, and another £100 for the navy. Out of the 
£1,000 he now has £600 for which he obtains from his 
bank a bill of exchange payable in two or three days' 
time in London. He forwards this bill for £600 and 
vouchers for £400 to the head customs office in London. 
The bill is sent to the Bank of England, is cashed by it 
when due, and the sum is credited to the account of the 
customs department at the Bank. On the same day on 
which the bill is cashed the department transfers the 
amount from its accoimt to that of the Exchequer. 
Thus £600 out of the £1,000 collected in A on January i 
has been paid into the consolidated fund, while the 



224 



The English Banking System 

remaining £400 is only represented by vouchers. The 
customs department in London now forwards the vouchers 
for the £100 which have been paid for the army and navy, 
respectively, to the departments for the army and navy, 
which in their turn, by means of the paymaster- general, 
through whom they receive the money voted for them, 
transfer each £100 to the account of the customs depart- 
ment. The latter immediately transfers the £200 thus 
realized to the exchequer account. In the way already 
described it also receives the £200 for its own expenses 
and transfers this back again. Thus finally the whole 
£ 1 ,000 is paid into the consolidated fund and at the same 
time the local expenses are met on the spot. 

{2.) The exchequer account. 

The government account has been kept by the Bank of 
England since 1834 under the name of ''The accoimt of 
His Majesty's Exchequer." Into this all the public reve- 
nues are paid in the shortest possible time after their col- 
lection, and from it all issues are made. The account has, 
like every other account, whether public or private, kept 
at the Bank, a credit and a debit side. The receipts 
are entered to the former, the issues to the latter. Both 
have subdivisions, subaccoimts for the various heads of 
revenue, and for those accountants to whom public money 
is assigned, either as final payment or for further distri- 
bution. This specification of the account was ordered by 
a treasury minute of March 2, 1855.^ The credit side had 
then nine subdivisions, which represented the receipts 
under the various heads of revenue without distinguish- 
es "Report on Public Monies," 1856, Ap. 2, p. 585. 

68299° — II 15 225 



National M o n et ar y C o mm is s t on 

ing the ordinary from the extraordinary. The debit side 
distinguished the payments for the consoHdated fund and 
supply services, and subdivided the latter into the expen- 
ses for army, navy, and ordnance. This plan was retained 
in essentials, but changes in detail have been made which 
particularize the receipts and expenditure a little further. 
At present the credit side has 25 subdivisions, the debit 
side 6. The appearance of the government accoimt is 
now as shown below. (See pp. 230, 23i.)<^ 

a This form is printed from that used by the Bank in sending its daily 
statement of the position of the exchequer account to the Treasury. Hence 
it is not exactly like the form described above. For each heading a sepa- 
rate sheet would probably be used. But the number of headings corre- 
sponds to the number of subaccounts. 



226 



The English 



Banking System 



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227 



National M on et ar y Commission 



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228 



The English Banking System 

The subaccounts on the credit side of the exchequer 
account include almost all the heads of revenue which 
appear in the yearly finance accounts. The divisions 
are not however made on the same principle. The former 
are distinguished according to the department by which 
the money is paid into the Bank, the latter according to 
the nature of the receipts. 

The subaccounts on the debit side are likewise dis- 
tinguished according to the offices which are paid direct 
from the Exchequer. The arrangement of the offices 
has not been altered since 1834 except by the consolida- 
tion of the pay offices. The paymaster-general's account 
has taken the place of the accoimts of the separate pay 
offices, the rest remain unaltered. Since all payments 
must be made through the paymaster-general, money is 
placed at his disposal both out of the consolidated fund 
and out of the supplies. Hence two subaccounts are 
opened for the assignments made to him. 

The exchequer account for any given day contains on 
the credit side all the receipts paid in up to that time, and 
on the debit side all the public issues made during the 
same period. Hence if the two are compared, the result 
gives the actual cash balance at the disposal of the Govern- 
ment, or supposing the receipts are less than the expendi- 
ture, the cash deficit. As we have described above, the 
receipts are remitted directly after collection and are paid 
into the exchequer accoimt in the course of a few days. 
In the case of the issues, on the other hand, it is the rule 
that only the sums required for current expenses are 
transferred from the exchequer account to the paymaster- 
general. It follows that all the sums transferred to the 



229 



National Monetary Commission 

issue departments for distribution are in fact actually 
spent already; no receiver or paymaster has a surplus 
balance of any importance, and the balance on the 
exchequer account represents the actual sum at the disposal 
of the Government for administrative purposes. 

The exchequer account is not the account of a dis- 
tinct central treasury as opposed to various other treas- 
uries. It is the repository for all public money. The 
money in the hands of the paymaster-general, of the 
army agents, and of the under-paymasters of the navy, 
is assigned for the payment of public liabilities which 
already exist. The balances, which must naturally be 
kept in hand in these cases, are small, and are kept small 
by estimates made in advance as accurately as possible. 
The exchequer account of the English financial adminis- 
tration at the Bank of England is the finest example of 
an economical centralization of public receipts and issues. 
It gives the Treasury the advantage of an unusually clear 
oversight of the financial position, and enables the audit 
department to check all the movements of receipts and 
expenditure. Taken in conjunction with the remaining 
public receipt and issue accoimts at the Bank, the ex- 
chequer account also supplies a basis for the control 
exercised by the Treasury over the revenue and issue 
offices. As regards the latter, however, the central 
administration is concerned only with the offices which 
appear on the debit side of the exchequer account. And 
amongst these the office of the paymaster-general is the 
only one of importance as a pay office. The others are 
not pay offices; the transfers to the Bank constitute pay- 
ments in themselves. In both these other cases there is no 



230 



The English Banking System 

question of payment transactions ; what happens is merely 
a transfer of bulHon through the mint, a repayment of pub- 
lic debt through the commissioners for the reduction of the 
national debt, and so on. 

(3.) The paymaster-general and his accounts. 

The paymaster- general is connected with every depart- 
ment of the administration. All demands for money 
from these departments are made to him. It is his duty 
to have the required sums transferred through the 
Treasury — i. e., through the auditor-general — from the 
exchequer accotmt, and then to undertake their assign- 
ment. But he not only receives money from the Ex- 
chequer. Deposits are frequently transferred to him 
from the public offices, and a portion of the various 
receipts are paid in through him. All payments of 
advances and repayments of arrears arising amongst the 
various branches of the public service pass through his 
hands. Thus it is through him that the public assets, 
which are concentrated in a large sum in the exchequer 
account, are applied to their proper purposes and dis- 
tributed amongst the different public services. So far 
as possible he carries out the payments in detail. For 
payments made outside London the public offices are 
assisted by the accountants and revenue officers sub- 
ordinate to them. 

The army department has agents by whom the pay- 
ments within certain districts are undertaken. They 
are charged with the sums allotted by the accountant- 
general of the war office and must present accounts of 
their expenditure. These agents in their turn distribute 



231 



National Monetary Commission 

the money to the paymasters of the regiments. The same 
method of distribution is employed in the navy.« The 
civil service is managed rather differently. In this case 
the Treasury determines which departments shall render 
accounts in connection with the different parliamentary 
votes — i. e., shall undertake the distribution of the money 
voted. ^ The accountants receive the money in large 
sums from the paymaster-general and themselves under- 
take the detailed payments, making use of the banks at 
which the district paymasters have accounts. 

In order to meet his liabilities the paymaster-general 
has four accounts at the Bank of England: The supply 
account, the cash account, the drawing account, and the 
bill account. He uses these as follows: 

Into the supply account he pays all moneys transferred 
to him from the Exchequer. Nothing is booked here 
except these transfers.^ 

o The agents employed by the army department are bankers. At the 
present time there are 8 army agents and 9 navy agents. See Whitaker's 
"Almanack," 1883, p. 163. [There are now 3 army agents (p. 223) and 4 
navy agents (p. 250.)] The proportion of payments for the army made 
by the agents and by the paymaster general, respectively, in 1879 was as 
follows: By agents at home, £8,500,000; abroad, £4,000,000; by the pay- 
master-general, £5,500,000 ("Minutes of Evidence before the India Com- 
mittee," 1880. Evidence of Mr. White, the accountant-general in the 
war oihce, on July 29.). 

& The Budget of the civil service is divided into seven classes and each 
class is arranged according to the different services for which the special 
vote is made. This arrangement divides the contents according to the 
objects of the administration. For purposes of issue and accounts, how- 
ever, the votes for different classes are paid into one office, since the arrange- 
Tnent of offices does not correspond with this division. A corresponding 
arrangement of the parliamentary votes is always used for the civil service 
estimates. In 191 1, 70 accounting officers made payments and presented 
accounts for 109 votes and 3 revenue departments for 7 votes. 

c A transfer to this account is indicated by the words "Supply account" 
inserted next to "paymaster-general" on the debit side of the exchequer 
balance sheet as printed on pp. 230, 231. 

232 



The English Banking System 

In the cash account are collected all sums deposited by 
other public departments, the repayments of advances 
made by one department to another, or money paid direct 
to the paymaster- general as collector; in brief, all receipts, 
whether actual or for transmission, which do not have to 
be paid to the Exchequer, and the receipts of the pay- 
master-general himself. 

These accounts are intended as sources of supply for 
the two others, and their balances are diminished only by 
deductions and transfers to the latter, not by payments. 
The payments are debited to the drawing and bills 
accounts, which are consequently also called the "working 
accounts." 

All sums used to cash the paymaster's checks are deb- 
ited to the drawing account, whilst the bill accotmt sup- 
plies the money needed to meet bills of exchange as they 
fall due. The separation of those accounts which are 
only required to act as reservoirs, and those actually used 
in making payments, serves to simplify the control of the 
receipts in hand and the payments made, and also is a 
protection against fraud. The position of the supply and 
cash accounts is known only to the paymaster- general, or 
rather to the assistant paymaster. He transfers money 
from these accounts to the two working accoimts from 
time to time, daily or it may be hourly, when demands 
are pressing. The checks by reason of which the actua 
payments are made by the Bank are issued by a subor- 
dinate official, the paymaster. Since the latter is ignorant 
of the balance in the drawing account, he would rim the 
risk, in case of an intentional fraud, of overdrawing. The 
distinction between exchequer credit and cash receipts, 



233 



National Monetary Commission 

represented by the supply and cash accounts, respectively, 
has already been explained in describing the division. 
The cash account serves, however, a special function, which 
makes it, as we shall see later, particularly important in 
the transactions of the paymaster general. 

The whole administrative system makes demands daily 
on the paymaster- general. For the army the controlling 
organ is the War Office, for the navy the Admiralty, for 
the civil service the administrative authorities supervis- 
ing the accountants. The paymaster- general must be 
supplied with the funds necessary to meet these demands. 
For this purpose he applies daily to the Treasury, to which 
he sends a statement of the payments made on that day 
and of those which will probably have to be made on the 
next day. This estimate is based partly on the amounts 
actually known to be needed to meet bills of exchange 
falling due, partly on a calculation of external transac- 
tions, of the requirements in previous years, and so on. 
The demands of the different departments on the pay- 
master-general are accompanied by a specification of the 
vote on account of which the issue is required, and of the 
fimd (consolidated fund or supply) to which the payment 
is charged. The paymaster demands money from the 
Treasury in the same form. The actual transfers are 
made in a lump sum. Suppose, for example, that £50,000 
is needed for the army, £50,000 for the navy, and £50,000 
for various civil service expenses; the comptroller-general, 
acting on the instructions of the Treasury, would transfer 
£150,000 from the Exchequer account to the supply ac- 
count of the paymaster- general. Then the assistant pay- 



234 



The English Banking System 

master transfers the required sums at intervals to the 
drawing and bill accounts. 

Although the paymaster-general regards as a single 
fund the sums standing at his disposal for issue, and meets 
all demands out of the one balance, he is not justified in 
regarding them as all alike without further examination, 
and in satisfying every claim. In his books, on the con- 
trary, the various votes are distinguished. This separa- 
tion of votes is, however, carried out only in so far as 
the appropriation of money by Parliament demands the 
application of definite amounts to definite objects. The 
army and navy have the right to make transfers within 
their respective votes, provided that the total amounts 
voted for the two services are adhered to.^ The pay- 
ments made on the civil list are carried out according to 
the classes established by i Vict., c. 2. The expenditure 
for the civil service is divided according to the different 
parliamentary votes, which are distinguished in the books 
of the paymaster-general according to the separate serv- 
ices for which they were made. ^ 

When a claim is made for the civil service the pay- 
master-general's own officials, the so-called examiners, 
compare it with its accompanying voucher. If the ex- 
aminers find nothing of note they forward the papers to 
the officer responsible for the assignment of the money — 

«■ " Provided always that the Issues for Army and Navy Services shall 
be made under the general Heads of 'Army' and 'Navy,' respectively." 
(29 and 30 Vict., c. 39, s. 15.) 

& These agree in substance with the arrangement of parliamentary votes 
used in the existing civil service estimates. But there they are distin- 
guished by reference to the persons responsible, the accountants, whilst 
in the books of the paymaster-general the arrangement in classes is 
adhered to and each class is credited with the amount of its vote. 



235 



National Monetary Commission 

i. e., to the paymaster, whose business it is to issue the 
checks. He in his turn sends them to the assistant pay- 
master, by whom they are arranged according to the dif- 
ferent votes to which they belong and are entered in a 
book, which book is also looked at by the examiners on 
the following day. The sum to be paid is at the same 
time booked in the assistant paymaster's ofhce. At the 
beginning of the year, after the opening of the general 
audit, each of the separate classes mentioned above is 
credited with the whole sum allotted to it. The account 
is then debited with each payment made in the course of 
the year. This method of bookkeeping used by the pay- 
master-general makes it possible to control the whole 
expenditure of the Government in as much detail as is 
desired, from the one standpoint. It is still possible for 
the department making the demand to misapply the 
money assigned to it under a particular vote. Such 
transfers are indeed allowed, if subsequently justified, in 
the case of the most important departments, the army 
and navy; in the civil service they are rare because most 
of the payments in this case are made in lyondon by the 
paymaster -general direct. 

It frequently happens that the claims made on the 
paymaster-general do not correspond with the sums which 
he has demanded from the Treasury. If we refer again to 
the example given above, it may happen that he has 
demanded £50,000 for the army, navy, and civil service, 
respectively, while the actual claims made are £40,000 
for the army, £60,000 for the navy, and £40,000 for the 
civil service. He will, however, making use of his general 
authorization, satisfy the increased demand from the 



236 



The English B a-n k i n g System 

navy, debit it with the same in his books, and make good 
the difference by demanding an additional £10,000 for 
the navy on the following day. So long as the credit 
allowed in the books of the paymaster-general for the 
different public services is not exceeded it is absolutely 
imimportant whether the demands of the departments for 
these amounts are covered by the transfers made by the 
Treasury, or rather by the auditor-general. The transfers 
of the latter are made merely in order to supply the pay- 
master-general with the required balance. The appro- 
priation for the public services is made through him and 
is only known subsequently to the Treasmy and to the 
audit department through his statement. Hence these 
appropriations can not be controlled beforehand by the 
Treasury and Audit department, because the paymaster- 
general has always, in his cash account, sums which he 
must use before demanding an exchequer credit. His 
payments are thus to a certain extent independent of the 
assignments from the Exchequer. In the cash account 
accumulate deposits from the public offices, repayments 
of advances from one office to another, and so on. The 
money in it has always been assigned already to certain 
public services. The following example will show how 
these sums are used by the paymaster-general for his 
payments. 

It may happen that the fleet has made over to a foreign 
country a portion of its accumulated stores. This loan is 
repaid in coiu-se of time, not in kind but in money. The 
money belongs to the navy, which has temporarily dis- 
posed of, and afterwards received back again, a portion of 
the amount voted for it in Parliament. Suppose it is a 



237 



National Monetary Commission 

matter of £100,000. This sum can not be paid into the 
Exchequer — i. e., into the consoHdated fund — for it does 
not represent revenue. It is merely a sum whose expen- 
diture the department has deferred and which will in the 
future be used up again. The £100,000 is thus paid into 
the account of the paymaster-general, and is placed by 
him in the cash account. At the same time he credits the 
amoimt to the account of the navy. 

As long as this sum is in the cash account the drawing 
account must be replenished from it. The payments 
which are made during the next few days will be met out 
of it. But the money thus used to meet all demands from 
all departments belongs to the navy. The consent of 
Parliament must have been obtained for these same 
demands in order that they may be met at all. The 
money from these votes must be assigned to these de- 
mands, which must ultimately be brought into agreement 
with the amounts voted. This correspondence is shown 
in the books of the paymaster-general as soon as the 
payments have been made. In the Treasury, however, 
the credits of the departments concerned appear no fur- 
ther affected in spite of the satisfaction of the claims. In 
the daily statement sent to the Treasury by the paymaster- 
general, these demands will, however, appear; they will 
be noted as ''overdrawn" — i. e., as provided with no 
funds from the Exchequer. After a few days the pay- 
master will demand credit for the departments which 
were overdrawn. He will receive this through his supply 
account and will now continue to v/ork in the usual man- 
ner. The navy is assured of its £100,000 since it had 
been credited with this amount by the paymaster-general; 



238 



The English Banking System 

a confusion between permanent and temporary receipts 
is prevented by the separation of the cash account from 
the others, and the retention of an unnecessary balance is 
avoided by the speedy employment of the money in the 
cash account. The principle of a single fiscal treasury — 
i. e., of the concentration of the supplies in a single fund, 
divided in the books according to the different services for 
which it is intended — is thus carried out to its fullest 
extent. 

The method described above of meeting claims against 
the administration is applicable only where grants have 
been made in the budget. It happens, however, in a 
country like England, whose fleet and troops are scattered 
throughout the world, that demands are made on the 
Government for which no provision has been made by 
parliamentary grant, and whose satisfaction can not be 
deferred until the consent of Parliament has been obtained. 
In such a case the paymaster-general must refuse to pay 
out the money from the Exchequer, since the sum de- 
manded is not charged on the consolidated fund, nor can 
any parliamentary authority be claimed for its payment. 
In order that the Government may not be left entirely 
helpless in such a case Parliament itself has provided a 
way of escape. ''The public interests require that the 
Government should possess the power of incurring 
expenses of indispensable necessity, although Parliament 
may not have previously provided for them. * * * 
Unforeseen events may happen and lead to an expendi- 
ture beyond the provision made by Parliament for the 
ordinary service of the year; and it must be for the 
interest of the public that no delay should occur in taking 



239 



National Monetary Commission 

the necessary measures, and in defraying the expenses 
which such events may entail."® 

A fund exists called the ''treasury chest fund" ^ whose 
purpose is to supply money for the service of the army 
and navy abroad and for the colonial governments, in 
unforeseen emergencies. This fund must amount to not 
less than £700,000 and not more than £1,000,000 (56 
Vict., c. 18). The sum is fixed by the Treasury in a 
minute which is laid before Parliament. The Treasury 
is authorized to use it as ''a Banking Fund for facilitating 
Remittances and for temporary advances for Public and 
Colonial Services to be repaid out of the monies appro- 
priated by Parliament to such services or otherwise appli- 
cable thereto." The governors of the colonies are per- 
mitted to take advances, in cases of urgent need, out of 
the treasury chest, w^hich advances must be paid back 
out of money voted. The treasury chest is controlled 
by the Treasury Chest officers. (In 191 1 there are 11 
of these in the Colonies and Egypt.) They have how- 
ever no separate fund kept apart in the Bank as a treas- 
ury chest fund. The money is not divided. Neither 
have they a direct power of assignment. They must on 
the contrary apply like anyone else to the paymaster- 
general — i. e., to the Treasury — stating the total demands 

o See Parliamentary Report quoted by Alphaeus Todd, " Parliamentary 
Government in England," ed. 1892, Vol. II, p. 244. 

& It arose out of the "army extraordinaries" from which in earlier times 
advances were made to the public accountants and other departments abroad . 
"Memorandum on Commissariat Chest Account" by Mr. Anderson, 1840. 
"Report on Public Monies," 1856, p. 589. "Memorandum," 1850, loc 
cit., p. 607. "Draft of a Bill for Limiting and Regulating the Commis- 
sariat Chest Fund," 185 1, loc. cit., p. 613. "Minutes of Evidence before 
the Select Committee," 1856. "Report on Public Monies," 1856, p. 7. 
Treasury Chest Fund Act, 56 Vict., c. 18. 



240 



The English Banking System 

which he has received on the treasury chest. They are 
however obliged to see that the money taken from the fund 
and the advances made are repaid out of the sums voted 
for the army and navy, or, in the instances cited, for the 
colonies. The treasury chest is intended only to make 
it possible to meet expenses until such times as Parlia- 
ment has made further provision for them.^ 

Besides this there is a second fund to meet similar 
necessities in the civil service. This is called the ''civil 
contingencies fund" and is limited to £120,000.^ The 
Treasury controls this fund and it alone is empowered to 
draw out money occasionally to meet ''new and unfore- 
seen expenditure for civil services at home, for which no 
votes have been taken, or to meet unforeseen deficiencies 
on ordinary votes. * * * No expenditure may be per- 
manently charged to this fund. All such payments form 
the subject of subsequent votes, and the money advanced 
must be repaid out of these subsequent votes. "^ By the 
paymaster-general act (53 Vict., c. 53) the commissioners 
of the Treasury were authorized to make regulations to 
transfer to the Bank any of the duties of the paymaster- 
general; to alter the existing regulations for the conduct 
of business in this office; and, in the case of funds which 
had to stand in the name of the paymaster jointly with 
that of any other person, to substitute for the paymaster 
any ofiicer of the Bank of England. All such regulations 
must be laid before Parliament within three weeks after 

«Tlie balance of the Treasury Chest Fund for 1909-10 is printed in the 
Appendix. 

& It arose out of the "civil contingencies votes," yearly grants for a 
fund to be applied to the purposes stated (index to "Report on Public 
Monies," 1886. Voce "Civil Contingencies," pp., 33 and 34.) 

°Todd, loc. cif., pp. 244, 245. 

68299° — II 16 241 



National M on et ar y Commission 

they are made. The paymaster-general act seems to 
show a tendency to eliminate this office of middlemen by 
degrees; hitherto the act has received no practical 
application. 

(4) Provisions for covering the cash deficit. 

It was customary until the middle of the nineteenth 
century to vote certain taxes annually, and to apply them 
to meet the expenditure agreed to annually, in contra- 
distinction to the revenues which were combined in the 
consolidated fund. The sugar tax was voted in this way 
until 1846. Since that time, however, the total public 
revenue has been paid into the consolidated fund. The 
expenditure agreed to yearly is met out of the stuplus of 
the consolidated fimd over the payments charged to it. 
There is no division of the receipts but only of the issues, 
and the ways and means act which assigns the money for 
the outlay voted yearly — i. e., the supply services — does 
this by appropriating the surplus from the consolidated fund 
for these purposes. Thus for bookkeeping purposes the 
consolidated fund services and the supply services are to 
be regarded as distinct. The former has the priority, 
and if the public receipts are insufficient to cover the 
expenditure, fresh provision must be made for the supply 
services. This difference is shown clearly by the manner 
in which a deficit is covered in each case. 

Thus at the end of each quarter (the first ending on 
Mar. 31), the Treasury draws up a return of the receipts 
and charges on the consolidated fund. In the charges are 
included the interest on the public debt which will fall 
due during the first days of the succeeding quarter. The 



242 



The English Banking System 

balance between the receipts and expenditures shows 
whether the revenue paid in during the past quarter is 
sufficient to meet all those charges, or how great the final 
deficit will be. 

A copy of this return is forwarded to the comptroller 
and auditor-general, who, after he has convinced himself 
of its correctness, notifies the Bank of England of the 
amount of the possible deficit. This notice empowers the 
Bank to advance during the next quarter, on a written 
demand from the Treasury, a sum not exceeding the 
amount of the deficit. The rate of interest on this ad- 
vance is agreed upon between the Bank and the chancellor 
of the exchequer. Usually it amounts to 2 or 3 per cent. 
This loan is made by crediting the exchequer accotuit 
with the sum advanced: the loan has to be repaid out of 
the growing receipts of the consolidated fund during the 
quarter in which the advance is made. The repayment 
is made by simply writing off the debt. This is the so- 
called deficiency advance, which has taken the place of 
the deficiency bills. It is repeated almost every quarter, 
since the Treasiu-y finds it more convenient to borrow 
money for short periods than to keep large balances during 
a long period. The receipts and issues connected with 
the consolidated fund are so steady that they are balanced 
without any difficulty in the course of the year. 

It is otherwise with the supply services, which can more 
easily lead to a disturbance in the financial system. An 
unexpected declaration of war, for example, leads to 
sudden demands on the public money for which no pro- 
vision has been made. In such a case the Treasury can 
demand a loan from the Bank in the same way as in the 



243 



National Monetary Commission 

case of the deficiency advance; it is bound to pay this 
back out of the current receipts during the succeeding 
quarter. If this is impossible, i. e., if the demand is so 
large that it can not be met by a possible increase in the 
receipts during the following quarter, application must 
be made to Parliament to supply the necessary money. 
For in such a case the cash deficit is not merely due to a 
disparity of time between the outlay and the receipt of 
the revenue, but is a real deficit resulting from the inade- 
quacy of the total revenue as compared with the total 
expenditure. 

This kind of loan is called a ways and means advance, 
and has taken the place of the ways and means bills. It 
also leads merely to a debt in the books and is of a tem- 
porary nature unless its peculiar character causes it to 
be converted into a genuine unfunded debt. By 50 Vict., 
c. 16, the interest on these advances, in so far as they 
then existed, was included in the permanent annual charge 
for the national debt. 

(5) Methods of payment. 

The connection between the public treasury and the 
Bank naturally leads to the use of the forms customary 
in banking for most of the government payments. These 
payments may be classified as book transfers, payments 
by check, and payments by bills of exchange. 

Transfers can necessarily only take place when the 
office making the payment and the payee have accounts 
at the same bank. They are not, however, confined to 
the Bank of England, since both offices and individuals, 
outside Ivondon, where it is necessary, have accounts at 



244 



The English Banking System 

local banks. But this is done as little as possible, as the 
aim is to make all payments through the Bank of Eng- 
land. In addition to the accounts already mentioned, 
viz, those of the Exchequer, the revenue department, the 
paymaster-general, the master of the mint, and the com- 
missioners for the reduction of the national debt, we 
must notice that accounts at the Bank are possessed by 
the commissioners of loans and public works, the receiver 
of the metropolitan police, the seven state prisons, and 
some others. Other accounts which, though not public 
accounts, are of importance in payment transactions, are 
those of the individual agents who keep tjieir cash at the 
Bank although not obliged to do so. All payments which 
the said offices and the agents have to make amongst 
themselves are managed by simple '*writs-off" — i. e., 
by written instructions to the Bank to transfer a sum 
from one account to another. 

The transfers " in the books of the paymaster-general 
must be distinguished from these book transfers at the 
Bank. By the former, repayments are made from one 
department to another by a simple pfrocess of book entry. 
This process has already been referred to in connection 
with the cash account. It is convenient to distinguish it 
from the other form of book transfer because it is really 
a question of refunding by a method of bookkeeping and 
not of actual payments. Both have, however, one advan- 
tage in common — they avoid the transfer of coin. 

All transfers of money between the head offices of the 
Government are thus accomplished by book entries merely. 

oThey were regulated by the Treasury on December 22, 1848, §10. Cf. 
also Mr. Anderson's "Remarks on Lord Monteagle's Memorandum on the 
Exchequer," 1854. "Report on Public Monies," 1856, p. 556. 

245 



National Monetary Commission 

It may happen also that an individual claimant has 
an accomit at the Bank. In this case, too, pay- 
ment will be made by book transfer.*^ This process 
consists merely in writing off the sum from the one 
account and crediting it to the account of the payee; it 
is accomplished on the spot, and can be immediately 
checked by both offices. 

The employment of bills of exchange for the transfer 
of money by public authorities has, as we have seen, 
been usual in English finance for about a hundred years. 
The revenue is now remitted to London entirely by bills 
of exchange. Payments abroad and also contractual pay- 
ments are made almost without exception in this way. 
Payment by bill of exchange has been expressly ordered 
by act of Parliament in the case of some payments at 
home.^ These are drawn either on the Treasury, the 
paymaster-general, or the Admiralty; are accepted by 
a stated official there, and are always payable at the 
Bank of England from the bill account of the paymaster- 
general.*^ 

Each day the paymaster-general sends the Bank a list 
of bills about to fall due. This list is signed by an offi- 
cial appointed for the purpose by the paymaster-general, 

oThis was provided by a treasury minute of December 22, 1848, §134. 
" But where claimants have accounts opened at the Bank of England, the 
payments are in all practicable cases to be made by a writ off or transfer 
order in preference to a check payable to bearer." 

& II Geo. IV, c. 20, 1830, provides that certain pensions may be paid 
by bills of exchange, which can be drawn on any collector; 2 and 3 Will. 
IV, c. 106, 1832, makes a similar provision for army pensions, at the same 
time limiting the right to persons residing on English soil. 

c Minute of Dec. 22, 1848, §19: " All bills of exchange, whether accepted 
at the Treasury, at the Admiralty, or at the Pay office itself, are made payable 
on the Paymaster-General's Bill Account." 



246 



The English Banking System 

and serves as an order to the Bank to honor the bills 
included therein when they are presented. 

Unless a special form of payment is ordered by Parlia- 
ment, the method is left to the discretion of the various 
authorities. There is no single rule determining the 
payments for the whole Government. Hence the use of 
bills of exchange is specially regulated for each branch 
of the public service.'* 

Payments by check, like the book transfers, require 
a bank account, but the payee need not possess one. 
Hence payments by check are much more widely used 
than book transfers, and in particular for small payments, 
whereas book transfers are generally, though not always, 
made for large sums. In this connection the payments 
of the paymaster-general are specially to be noted, for 
the payments of all the public departments are made 
through him whenever possible. When it is necessary, 
indeed, he places large sums at the disposal of the different 
departments, leaving to them the further distribution, 
but he also takes a considerable share in the detailed 

ct In the case of the navy, which most often has occasion to use bills of ex- 
change, the provisions referring to their use are contained in "The Queen's 
Regulations and Admiralty Instructions for the Government of Her Majesty's 
Naval Service" (Feb. 13, 1879, pp. 499-515). The accountant officer of 
every ship has the right, subject to the consent of the captain, in ports 
where there is no navy office, and no treasury chest, to draw a bill falling 
due three days after sight on the accountant-general of the Admiralty. 
The rate of discount must be certified upon the actual bill by the British 
consul or two reputable merchants. At the same time a "letter of advice, ' * 
countersigned by the captain, must be dispatched to the accountant- 
general. To meet chance expenditures the accountants carry ready money 
with them, the total being limited, however, to £65 in the smallest ships 
and £300 in the largest. Further, every member of a ship's company can 
transmit money home through the accountant, who draws a bill upon the 
paymaster-general for the sum which is handed to him, and dispatches it to 
the address indicated. 



247 



National Monet ary Commission 

payments. Local payments are made through the col- 
lectors; the repayments to the revenue departments are 
made by the paymaster by means of book transfers; 
naval expenses abroad, and contractual payments, are 
managed through bills of exchange which the paymaster 
has to honor by an order on the bill account. There 
remain the payments of the civil list and of the civil 
service and army, so far as these obligations are not ful- 
filled in the ways already mentioned. If the payments 
fall due in London they are made through the paymaster- 
general, and, with few exceptions, by check .« 

All sums over £50 must in fact be paid by check. For 
sums between £5 and £50 the payee may choose whether 
he will take a check or coin. Sums under £5 are always 
paid in coin. For sums which exceed a certain amount 
the check is crossed. Each check is signed by two of the 
officials of the paymaster- general, examples of whose 
signatures are kept at the Bank.^ All checks are paid 
from the drawing account. For payments by coin the 
paymaster- general daily receives from the Bank a sum 
in coin corresponding to the amotmt he expects to need. 

(^ As early as 1836 a treasury minute of Aug. 19 states that: " No payment 
whatever is now made by the Army Pay Office, be the amount ever so small 
except by means of a check on the Bank of England." By the consolida- 
tion of the pay offices, the paymaster-general succeeded to this practice 
within the limits stated in the text. The ordnance pay office pays in cash 
salaries, half-pay, pensions; the navy pay office, sums under £5. 
("Report on Public Monies," 1856, p. 498.) 

&A general authorization is sent beforehand to the Bank: "You are 
authorized to pay on the countersignature of Mr. So-and-So checks for 
public services drawn upon my drawing account by the person thereby 
appointed to that duty." 



24S 



The English Banking' System 

(6) The control over money transfers. 

Without describing the bookkeeping itself in more 
detail, it is necessary to explain how and to what extent the 
Treasury and the audit department supervise the transfers 
of money between the various offices. It is clear from 
what precedes that the whole financial system is so cen- 
tralized that all public receipts are entered in the exchequer 
account and all issues must be made from this account. 
But it is evidently not sufficient for the Treasury to super- 
vise this account alone, noting the variations in it due to 
the in and out flow of money. Except in cases where the 
receipt and issue offices manage their own money inde- 
pendently, the Treasury must see that the former hand 
over their balances correctly, and that the latter make a 
proper application of the money supplied to them. For 
purposes of finance it aims at preventing the accumulation 
of any superfluous cash balance, while for purposes of con- 
trol it aims at hindering or quickly detecting any fraud, 
and finally, for purposes of administration, it must have a 
grasp of the entire position of the public finances as regards 
both revenue and expenditure. 

Since the revenues are remitted to I^ondon and credited 
to the accounts of the revenue departments, the contents 
of the latter at any time show the exact position of the 
receipts throughout the country during the preceding days. 
The Treasury obtains in addition full information concern- 
ing the local expenditure from the system of accounts 
which we have described. All other issues are managed 
by the Treasiu-y itself, and, since they involve alterations 
in the accounts at the Bank, and in the books of the pay- 
master-general, an examination of these books and of the 

249 



National Monetary Commission 

bank accounts gives complete knowledge of the monetary 
transactions at the public offices. 

The miscellaneous receipts are managed by the Treasury 
itself, so that the revenue departments which remain to be 
supervised are the customs, inland revenues, post and 
crown lands offices. Each of these offices sends a daily 
statement to the Treasury of the receipts transferred by it 
to the exchequer account, but not of the receipts actually 
collected by it. The Treasury receives a weekly return 
from the inland revenue office specifying the total receipts 
under their various heads. This furnishes an exact 
account of the receipts collected by the office in the course 
of the week. The customs office sends in a similar state- 
ment every month. Finally the offices of the inland reve- 
nue, the customs, and the post<* send the Treasury four 
times a year a balance sheet, so-called, which contains a 
specific account of the receipts paid in, the payments made, 
and the transfers to the Exchequer. By means of these 
various returns the Treasury learns (i) daily, how much 
the offices have paid into the exchequer account; (2) 
weekly or monthly, the amount received during the period 
under the different heads, at the two most important 
revenue offices; (3) quarterly, how great the receipts and 
issues have been during the last three months, under which 
heads the issues have been made, and what balance the 
three revenue offices hold. 

All these returns can be verified by comparison with the 
returns which the Bank must supply to the Treasury, and 
they in their ttun are intended to serve as a check upon the 
statements of the Bank. The Bank forwards a daily 

o The crown lands office forwards no special specification. 

250 



The English Banking System 

return of the exchequer account. ° This specifies on the 
credit side the various heads of the revenue, and thus shows 
how much has been paid into the account under each of 
these. The sums here specified must correspond with 
those given in the returns of the revenue departments 
themselves, and any discrepancy is at once inquired into. 
A detailed comparison of this return with the weekly and 
monthly returns of the inland revenue and customs offices 
shows also how large the daily balances at these offices 
have been. Besides this daily statement the Bank also 
sends in a weekly return, showing the position of all the 
public accounts, from which the Treasury can see at once 
the position of the various revenue departments. This in 
its ttnu serves to check the statement of the balance in 
hand, which may be shown in one of the quarterly returns 
which have to be presented by the revenue departments. 
The returns of the paymaster-general combined with those 
of the Bank make it possible to supervise the management 
of the issues. Together with the daily claims for money a 
retiu-n is sent in which states the amoimts credited to the 
different public services out of the moneys assigned to 
them in the books of the Exchequer. The position of the 
various public services can be learned by combining this 
rettnn with that for the preceding day, and with the sums 
demanded and transferred from the Exchequer for such 
services. The assets of the previous day are increased by 
the latter. They form the balance for each service at the 
beginning of the day for which the return is now presented. 
A comparison shows by how much this has decreased in the 

^See the form given above, pp. 230-1. 



251 



National Monetary Commission 

course of the day. The sums demanded from the Excheq- 
uer for the different services are merely credited to the 
latter by a book transfer, but since the money forms a fund 
from which demands can be met for which nothing has 
been transferred, it frequently happens that the different 
services appear in the return as ''overdrawn." This 
means that more has been paid on their behalf than was 
demanded. It follows then that other services must have 
used less than the amount credited to them, since the total 
of all the amounts credited forms the whole cash balance 
standing at the disposal of the paymaster-general. 

The bank return on the position of the exchequer 
accoimt contains on the debit side the statement of the 
transfers made on that day from this account to the sup- 
ply account of the paymaster- general. These transfers 
must agree with the demands sent in by the paymaster- 
general on the previous day — i. e., with the assignments 
made by the Treasury through the auditor- general. Thus 
the Treasury checks the proper execution of the assign- 
ments. This daily bank return contains however no in- 
formation on the state of the supply accounts, since the 
transfers made by the paymaster- general to his working 
accounts are not given in it. But the weekly return of 
the Bank on the position of all the public accounts, does 
give particulars of the four accotmts of the paymaster- 
general, the amount of which must agree with the total 
amount of the balances of the different services as stated 
by the paymaster- general in his last return. 

The daily return of the paymaster general gives no par- 
ticulars of the votes, but is arranged imder the general 
heads, army, navy, civil services, etc. But each month he 

252 



The English Banking System 

forwards a specific statement to the Treasury. The 
statement of the position of the four accounts at the Bank 
follows a combined statement of the balances of the public 
services, as in the daily return. This general abstract is 
the only return made for the army and navy, since in 
these cases the payment of the money is not classified 
under the different heads. The expenditure from the 
civil list and the civil services, on the other hand, is par- 
ticularized according to the various classes and parlia- 
mentary votes. 

The Treasury supervises the expenditure made through 
the Mint and the national debt commissioners in the same 
way as that of the paymaster-general, and keeps a check 
on the proper crediting of the money transferred to the 
Bank of England. 

All the above-mentioned returns of the Bank and of the 
receipt and issue offices supply the basis for the public 
bookkeeping managed by the Treasury, which follows, 
step by step, the course of the receipts and expenditures. 
All the returns are forwarded to the auditor- general, who 
has however no right of intervention. He may only use 
them as a basis for the control which he exercises ah ante 
on the issue of money from the Exchequer, and for his 
subsequent control of details. 

II. THE BANK AS THE OFFICE FOR THE MANAGEMENT OF THE 

PUBUC DEBT. 

We have shown that the position held by the Bank of 
England with regard to the management of the public 
debt has remained imaltered in essentials since 1750. At 
that time its permanent loans to the Government had 



253 



National M on et ary Commission 

come to an end and, with the exception of the loan raised 
in 1816 and repaid within three years ,^ the Government 
has not made use of the Bank's resources since this date. 
The connection between the Government and the Bank 
developed much more actively with respect to temporary 
loans, for which application was regularly made to the Bank 
imtil about 1817 or 1819. After this time the short date 
loans were divided into those raised to cover a cash deficit, 
which were obtained always from the Bank in the manner 
provided by law, and the imfunded debt proper, in which 
the Bank might share when specially authorized to do so 
by Parliament. The acts of 1866 and 1877 already 
referred to, which transfer to the Bank the management 
of the debts, contain a clause by which the Bank is per- 
manently authorized to make advances to the Govern- 
ment on treasury bills and exchequer bills or bonds, issued 
with the consent of Parliament. 

The relations of the Bank to the various forms of public 
debt are then as follows : Since 1 8 1 6 it has not been 
employed to raise a permanent funded debt out of its own 
resources. It is authorized to provide loans on the secur- 
ity of government bills of the form described. It invari- 
ably supplies the temporary advances required to equalize 
current expenditure with current receipts. Finally the 
entire public debt, whether it has a share therein or not, 
is entrusted to its management. 

The function of management involves, in the case of the 
unfunded debt, the following activities: 

On the order of the Treasury the Bank supplies the 
required number of treasury bills, and exchequer bills 

a [This loan was not paid off till 1834. — ^H. S. F.] 
254 



The English Banking System 

and bonds, made out for the amounts demanded by the 
Treasury and marked with numbers showing the order 
of issue of the bills, and sees that each separate paper is 
signed by the comptroller and auditor-general. It has 
then to hand over the bills so prepared to the persons 
appointed by the Treasury for the purpose, and to transfer 
the sums they represent to the exchequer account. The 
payment of interest on the cashing of a bill is done with- 
out a special order from the Treasury on presentation of 
the interest coupons whose payment is due, or of bills or 
bonds, after the date of payment has been announced by 
the Treasury in the London Gazette. The sums needed 
for this are transferred by the Bank from the exchequer 
account at the same time as the money required for 
paying the interest on the funded debt. 

The duties of the Bank as manager of the funded debt 
are tiresome, though very simple in principle.^ As soon 
as a loan has been subscribed and the payments have 
been made, the chief cashier of the Bank issues a scrip 
certificate for each subscriber, giving his name, position, 
and residence. The name and amount given on this 
scrip are entered in a journal and copied from this into 
the ledger, which is arranged in alphabetical order. As 
soon as this is done the mere scrip certificate becomes 
stock — i. e., a freely transferable share in the public 
debt, which carries with it certain rights (a claim to 
interest, exemption from taxes, etc.). The purchase and 
sale of these stocks is managed through stockbrokers; 

« These duties are expressly regulated by the National Debt act, 33 
and 34 Vict., c. 71 (Aug. 9, 1870). A description of the whole procedure 
is given by Thomas Hankey, "The Principles of Banking," 2d ed., London, 
1873, p. 78, et seq. 



255 



National Monetary Commission 

the necessary legal transfers of the shares from the seller 
to the buyer are managed by the Bank. The stockbroker 
sends to the Bank a transfer ticket, stating the names of 
the buyer and seller of the amount to be transferred. « 
This is checked at the Bank to make sure that the seller 
holds the given sum, and then the transfer to the buyer 
is entered in the transfer book. A duplicate of this list 
can be seen at the office of the National Debt Commission. 
A stock receipt corresponding to this entry is signed by 
the seller, who also signs the entry in the transfer book, 
and the former is given to the buyer. By the signature 
to the stock receipt the Bank is freed from liability toward 
the seller for the value disposed of, while by obtaining the 
same receipt the buyer secures a claim represented by the 
entry in the ledger. Such transfers may be either of the 
whole value entered to any one person, or of any portion, 
however small, of this value. The transfer, like all the 
transactions connected with the stocks (receipt of inter- 
est, repayment, etc.), can be made by power of attorney. 
Transfers on account of death, or as presents, etc., can 
be made without the help of stockbrokers. There is a 
separate office for the registration of provisions made by 
will and arrangements between living persons, where the 
discharge of the original owner and the transfer to the 
claimant takes place. 

The Bank shall allow any holder of consols to have 
more than one, but at most four accounts in the same 
name, but each account must be distinguished by a 

O' These transfer tickets are kept, so that in case the ledgers were acci- 
dentally destroyed they could be re-compiled by means of the tickets and 
of the dividend books, which are also preserved, but in a different place. 



256 



The English Banking System 

number or some similar designation.^ Trustee holdings 
are excluded.^ 

The name ''stock " is applied both to the separate shares 
and to the whole loan, in so far as it carries with it a per- 
petual annuity. The stock is generally added to one of 
the already existing stocks bearing the same rate of inter- 
est. '^ The stocks now existing are: Two and one-half per 
cent consols, 2^ per cent consols, 2% per cent consols 
(16 Vict.), terminable annuities for life and terms of 
year, terminable annuities created by the National 
Debt Act, 1887, and the Finance Act 1899 (savings bank 
annuities and book debt annuities), sinking fund an- 
nuities. The interest falls due on January 5 and July 5. 
In order to make all preparations for the payment of the 
dividends the ledgers of the national debt are closed for 
transfers before the date of payment, but not for more 
than 37 days.^ Any person who, on the day of closing, 
is entered in the books as a holder of stock is entitled to 
the half yearly interest falling due.^ The method of pay- 
ing the dividends is as follows: "The name of each pro- 
prietor is entered on a ' slip,' with the capital stock belong- 
ing to him, the half yearly interest, the amount to be de- 
ducted for income tax, and the net sum payable after the 
said duty has been deducted. These slips * * * are 

<^ National Debt Act (51 Vict., c. 2) and Stockholders' Relief Act (55 
Vict., c. 39). 

& Trustee Act, 56 and 67 Vict., c. 53. 

c 33 and 34 Vict., c. 72, I, p. 3. "Stock means the several capital or 
joint stocks of perpetual annuities * * * and includes any share or 
interest thereon respectively." 

^ [Since 1861 stock may be sold and transferred any day in the year, 
holidays excepted. Hankey, loc cit., 3d ed., p. 91. — H. S. F.] 

«Nat. Debt Act (Stockholders' Relief), 55 Vict., c. 39. 

68299° — II 17 257 



National Monetary Commission 

then printed, and eventually made up into volumes form- 
ing the dividend books."" The total stock on which 
dividend is to be paid and the total amount of the latter 
can be found by adding up the different columns. After 
the entries have been checked the dividend warrants are 
issued. These state the amount of stock and the portion 
of dividend due thereon. They also are printed, bound 
up together, and checked by the entries in the dividend 
books. The dividend books thus prepared are taken to 
the dividend room where the claimants of dividends or 
their representatives receive the dividend warrants on 
declaring their name and the amount of stock to which 
they lay claim. They must sign the dividend book and 
the warrant, their signature to which is certified by one 
of the bank clerks. The warrant is payable at once in 
the adjoining dividend pay office, or may be used as a 
negotiable instrument, since it is payable to bearer.^ 

The holders of stock may also have their dividend war- 
rants sent by post; for this purpose they must send a 
signed request to the Bank, giving an address at some 
place in the United Kingdom, the Channel Islands, or the 
Isle of Man. The despatch of the warrant by the Bank, 
on the authority of such instruction, is regarded as equiva- 
lent to delivery, as is also a transfer to another bank. 

The dividend warrants, as they are paid off from time 
to time and collected at the Bank, are registered in a 
special office, the check office, according to the numbers 
they bear. When these are compared with the warrants 
still outstanding in the dividend rooms the result gives 

O' Hankey, 3d ed., p. 82. 
. & 32 and 33 Vict., c. 104; 33 and 34 Vict., c. 71, p. 20 et seq. 



258 



The English Banking System 

the total dividend actually paid, still unclaimed, and 
drawn but not presented for payment. All money due 
as dividends which is not claimed within ten years is 
transferred to the account of the national debt commis- 
sioners'^ as well as the stocks on which it is due. But 
claims to it can still be made at any time. The unclaimed 
dividend office at the Bank examines such claims and 
is the only office at the Bank whose expenses are paid 
by the Government.^ At the demand of the Treasury 
the National Debt Commissioners must pay into the ex- 
chequer from the account of unclaimed dividends such 
sums as may be desired up to £1,000,000. (4 Ed. VII, 
c. 7.) 

The number of public debt accounts kept by the Bank 
is at present about a quarter of a million, but it naturally 
varies with the consolidation and repayment of the various 
stocks. 

These variations are increased to no small extent by the 
possibility of procuring negotiable certificates instead 
of stock.*^ It is provided in Part V of 33 and 34 Vict., c. 
71, that any holder of stock may obtain a stock certifi- 
cate — i. e., a certificate of his claim to his stock or to a 
part of it — with coupons annexed entitling the bearer 
to the dividends on the stock or part of the stock. These 
certificates are issued for no sum less than £50 or a mul- 
tiple of £50, and when issued are not made out to order. 

« Since 56 Geo. Ill c. 60 (18 16). Unclaimed interest at the Bank of 
England was first claimed as public property in 1790. In tlie case of the 
South Sea Company this was not done until 1844 (Cf. "Rep. Publ. Inc. 
and Exp.," 1869, II, p. 497). 

& 52 Vict., c. 6. 

c Their issue was first allowed by 26 Vict., c. 28. 



259 



National Monetary Commission 

Hence they entitle the bearer to the stock described in 
the certificate, but he can change them into a ''nominal 
certificate" at any time by inserting a name in the pre- 
scribed place. ^ These certificates can be changed into 
stock at any time. Should the certificates be lost, the 
Bank, before issuing a duplicate, may require evidence of 
ownership and of the loss or destruction, the advertise- 
ment of the loss or destruction in two I^ondon daily papers, 
and the transfer of an equivalent sum of stock or the 
execution of a bond of indemnity, with guarantees; not 
more than a year must have passed since the loss. Six 
years after the transfer of stock or the execution of the 
indemnity the facts must be advertised again, and only 
after this can the stock be released and the indemnity 
canceled. (Stockholders' Relief Act, 53 Vict., c. 39.) 

The sum paid by the Government to the Bank for the 
expenses connected with the management of the public 
debt has been regulated by various acts of Parliament 
during the nineteenth century and has been fixed at a 
definite rate in proportion to the amount of the debt. 
By 55 and 56 Vict., c. 48, the rate was fixed as follows: 
For the first £500,000,000 a yearly sum of £325 is paid; 
for each million in excess of the amount, £100 is paid. 
By 24 Vict., c. 3, it was ordered that annuities for terms of 
years should be reckoned at a capital sum and should be 
"valued at Fifteen Years Purchase, if originally granted 
for a Term of Fifty Years or under." The yearly sum of 
£4,000 "Towards the Expenses of the House," which had 
been paid since 1694, was discontinued as was also the 

^ The manner of issuing the certificates is regulated by the Finance Act 
of 1902. (2 Ed. VII, c. 7, s. II.) 



260 



The English Banking System 

additional £1,579 paid on account of the transfer of 
South Sea debt.'^ 

For the administration of the floating debt the Bank is 
paid as follows: £100 per million of exchequer bills and 
exchequer bonds and £200 per million of treasury bills. ^ 

The rate of payment is calculated thus: The sum out- 
standing on the last day of the financial year, according 
to the computations of the Commissioners of the National 
Debt, forms the basis for reckoning the sum to be paid 
to the Bank.^ In the case of treasury bills the reckoning 
is based on the maximum sum which has been outstand- 
ing at any period of the past financial year,^ 

Conclusion. 

By a process of gradual evolution, lasting for almost 
two hundred years, England has arrived at a point 
where its public finances are inseparably united with 
those of the Bank, and the latter has taken its place as an 
indispensable part of the financial organization. At an 
early stage in this process it was demonstrated that a 
bank could be more usefully turned to account by the 
State than in raising irredeemable loans, issuing worth- 
ed The sums received by the Bank in consequence of this act amounted 
to £200,066 in 1862-63. Two years previously, in i860, the Bank's 
expenses of management were £126,445, so that assuming them to be 
the same for 1862-63, it made a profit of £73,621. But since the Bank 
has to refund all the losses suffered by the public creditors through fraud, 
forgery, etc., its expenses are frequently much greater. For instance, 
in 1830 it had to pay £214,000 in consequence of a great fraud. The 
average yearly loss on this account was £7,000 between 1808 and 1862. 
("Rep. Publ. Inc. and Exp.," 1869, II, p. 581.) 
& A separate payment is made in case of a conversion. 
c 56 Vict., c. 48. 
d 6 Ed. VII, c. 10, and 7 Ed. VII, c. 20. 



261 



National Monetary Commission 

less paper, and other similar financial operations. Some 
coimtries have attempted in the course of the nine- 
teenth centm^y to imitate the system, indisputably a 
good one, on which English finances are managed. Its 
advantages for the Government are evident — a decreased 
cash balance, a simplified system of office organization, a 
speedy and cheap method of money transfers, etc. But 
to produce these advantages it is essential that the whole 
organization of the public money and not merely indi- 
vidual sums should be transferred to the Bank. The 
Bank must be used as the institution where public pay- 
ments are actually made, not merely as a place through 
which money passes in the course of transfer from one 
public treasury to another. This mistake underlies, for 
example, the relations of the German Reichsbank to the 
German Empire and the Federal States. The latter are 
expressly restricted to the mere drawing of orders of 
transfer on the Reichsbank, and the position of the 
Imperial Central Treasury as a section of the Bank serves 
only to conceal the fact that the relation of the Empire 
to it is but little better. The Bank, by its splendid organ- 
ization and its branches, would be specially suited to 
undertake the financial business of the Empire, but in 
actual fact the payments which it makes on behalf of the 
Imperial Government are very few, and it is chiefly 
employed as a connecting link between the independent 
public treasuries. Hence there is no question of employ- 
ing the cash balance in Germany to the extent to which 
this is done in England. And it is this feature which 
constitutes the special merit of a complete union between 
the management of the public money and the Bank, as 



262 



The English Banking System 

this is exemplified in England. By the transference of 
the management of public money to the Bank of, Eng- 
land, the whole of the Government's cash balance, in so 
far as this is not applied directly to the making of pay- 
ments, has become available to supply credit facilities for 
the community. Moreover the cash which must be kept 
in hand for payments is much reduced, owing to the 
technical adjustment of the methods employed, which 
have come to resemble exactly the forms of exchange used 
in private transactions. 

It is, indeed, remarkable that the English Government 
has made no provision for employing this surplus balance 
on its own account, but has resigned it entirely to the 
Bank. With the exception of the proposal, to which we 
have referred elsewhere, made by Burke in 1 780, and which 
was not acted upon so far as is discoverable, it has appar- 
ently never been suggested that the State should reclaim 
the profit arising out of the cession of this balance. In 
this respect the method adopted in a similar case by 
another State, Belgium, shows a decided advance. 
According to the law of May 20, 1872, and the agreement 
of July 17, 1872, the National Bank, which acts as state 
banker, is bound to employ the sums available for the 
benefit of the State. All the regulations of English 
financial administration pass over in silence the very 
question which makes the entrance of the Bank into the 
service of public finance an important economic matter, 
viz, in what manner and to whose profit the State ought 
to employ its surplus balance. The advantages which 
consequently accrue to the Bank of England are in fact 
no small ones. It may, however, certainly be admitted 



263 



National M o n et ar y Commission 

that the question who ought to obtain the advantage 
resulting from the appHcation of banking methods, is a 
secondary consideration as compared with the indubitable 
profit which is obtained in any case by the trading com- 
munity as a whole. In England this profit is of an 
importance not to be despised, even taking into account 
the magnitude of the English money market. Owing to 
the central position of the Bank of England in regard to 
the English banking system the public revenue is treated 
in the same way as the surplus cash which a private 
individual places in a bank, and the public payments pass 
through the same channels by which that surplus returns 
to its source. The importance of this union of private 
and public methods of payment can not be given in 
figures, for statistical data are lacking from which the 
saving in cash transactions could be reckoned; but we 
can obtain an idea of it by examining the process of 
public payments in general. 

The revenue is collected by the collectors. They 
receive it for the most part not in cash, but in cheques." 
They present these cheques to a bank and obtain instead 
a bill of exchange which is forwarded to the Commis- 
sioners for the collection and management of the inland 
revenue in Eondon. The Commissioners send the bill 
to the Bank, where it is taken up. The Bank does 
not, however, as a rule, receive coin for the separate 
bills, since the transaction is usually with a bank be- 
longing to the clearing house, and thus a process of 
"compensation" takes place in the well-known manner. 

o All the demand notes for payment used by the collectors state the 
name of the Bank in favor of which cheques should be crossed. 



264 



The English Banking Syste 



m 



The sum with which the bank is credited by the per- 
son upon whom the bill is drawn is at once placed by 
it to the credit of the accoimt of the revenue depart- 
ment. The latter transfers it to the exchequer account. 
In this way the great reservoir of the revenue is filled. 
From thence the sums needed for the public services 
are transferred to the account of the paymaster- 
general. This is all accomplished without employing a 
single coin. The process of issue now begins. Bills of 
exchange on the Government are presented. They are 
made payable at the Bank. Whether the claimant 
receives coin or not makes no difference as far as the 
administration of the public finances is concerned. In 
any case the sum will be debited to the bill account. 
Probably, however, the person presenting the bill is some 
great banker who has business relations with the Bank 
of England. In most cases a process of compensation 
will be possible. On another occasion the paymaster- 
general may give cheques to the claimants. These 
cheques are crossed and will be sent by the possessors to 
their bankers who will credit them with the values thereof. 
Perhaps at the same time the possessor draws a cheque on 
these same assets, in order to pay a tax which has fallen 
due in the meanwhile, and the circular process begins 
anew. The bankers themselves, if they are country 
bankers with only a small business, have relations with 
the large banks. The cheques issued by the paymaster- 
general are deposited with these latter like all the others, 
i. e., they are transmitted to be placed to the credit of 
the possessor. But the great bankers take part as before 
in the process of compensation, in the center of which is 



265 



National Monetary Commission 

the Bank of England. In yet a third case the amount is 
transferred from the Exchequer account to that of the 
commissioners of loans for public works. This constitutes 
a loan to a company. If the latter has its headquarters 
in lyondon it will also have a banker there; if in the 
provinces, an accoimt will be opened for it at some 
country bank. The Bank of England will again transfer 
the amoimt in question to this bank by the method usual 
between bankers. When the Bank has to pay the 
interest on the national debt, the money is assigned to it 
by means of a book transfer. The payments made in 
coin by the Bank itself amoimt to but little. In by far 
the greater number of cases it need merely transfer the. 
sums to the accounts of the bankers. 

Two advantages are inherent in the system of having 
the public money managed by the Bank of England: 
Clearness and the avoidance of cash payments. The con- 
centration of all transactions in the exchequer account 
allows not only the Government and the bank, but, by 
means of the weekly return, the public, to know the actual 
condition of the public assets. The fluctuations in the 
account afford a sure guide to the times of inflow and out- 
flow of money, and both the bank and the open money 
market can confidently base their operations upon the 
experiences of previous years. 

The avoidance of cash payments is of primary impor- 
tance in a country like England, where payment by check 
has been so widely adopted and where the extensive oper- 
ations of the money market rest upon a small reserve in 
the bank of issue. Although the monetary transactions of 
the Government do not constitute a large proportion of 



266 



The English Banking System 

the total English transactions, yet the withdrawal of even 
this small part of the total operations of the market would 
be intensely felt. The serious disturbances which have 
been repeatedly caused in the United States by the inde- 
pendent position of the Treasury show with sufficient 
clearness the important economic effects of a separation 
between the Government transactions and the money 
market under a system where check payments prevail. 
The safety of check payments demands a imiversal money 
market. Where private transactions are still largely car- 
ried out in gold or notes, the partial adoption of a cash 
system by the State is much less felt than imder a system 
of deposit banking. 

The Bank of England manages the public deposits in the 
same way as the other deposits intrusted to it: 60 to 70 
per cent are lent out at bank rate, the rest is kept unem- 
ployed at the bank. The retention of even this proportion 
as a reserve is regarded by the market as the withdrawal 
of so much wealth and is resented; and during the last 
decade frequent complaints have been made of the 
method of administering the public deposits on two 
grounds,' that of the importance of the unemployed 
reserve and that of the high rate charged for loans. The 
practice of the English bank of issue deprives the market 
of about a third of the deposits intrusted to it. This policy 
is felt much less in the case of the other deposits — ^which 
consist partly of deposits for other banks, cash balances, 
and assets temporarily not available, such as those of the 
Colonial Governments, and partly of fairly constant private 
deposits — ^than in the case of the public deposits, which 
are almost entirely withdrawn from the market to the 



267 



National M on et ar y Commission 

bank during the first two months of the year. The 
continuance of the autumn "dear money" over the end 
of the year and on to March is, not without justice, 
attributed to the accumulation at the bank during this 
period of the money collected in taxes. The retention of 
about a third of the money deposited seems, at any rate, 
to indicate too strict a business policy, and the demand that 
the public deposits should be more freely placed at the 
disposal of the market appears not without justification. 

The high loan rate at which the bank advances money 
is also frequently the subject of severe criticism. The 
public money, so it is often argued on the open market, is 
placed at the disposal of the bank without any counter 
payment on its part, and although the expenses connected 
with the management of the public money are not incon- 
siderable, yet the Bank of England, by its connection with 
the State, secures freely the largest deposit account con- 
trolled by any English bank, without having to imdergo 
any expenses in earning it; hence there is no justification 
for making the bank rate essentially higher on the average 
than the market rate. 

The Continental Governments which have intrusted the 
management of their money to their banks of issue, have 
in some cases — Belgium — made regulations as to the dis- 
posal of the money deposited; in other cases — e. g., Bel- 
gium, Italy, and the Netherlands — reserved for them- 
selves counter advantages. In England the Govern- 
ment has left the disposal of the surplus balance entirely 
in the hands of the bank, and except for the proposal 
referred to elsewhere, made by Btorke in 1780, 
no suggestion can be discovered to claim any profit for 



268 



The English Banking System 

the State from the balances thus intrusted. An EngUsh 
financial authority has, on the other hand, pronounced 
before the American Commission on Banking, in favor of 
the investment of a portion of the deposits in bills, accord- 
ing to the Belgian plan,i but to this the prevailing opinion 
in the city objects on the ground that foreign bills are not 
always a perfect security for obtaining gold. The fact 
that no interest is paid on public deposits corresponds 
with the custom of London banking, according to which 
no interest is allowed on current accoimts. The high rate 
of interest charged for loans is due, apart from purely 
monetary considerations, to the position of the bank; 
interest has to be provided on a heavy capitalization, 
there is no reserve capital, and the privilege of note issue 
has for a long time brought no advantage to the bank, but 
on the contrary has hindered it appreciably in its regular 
business. 

The policy of centralizing the Government assets in 
London has contributed to an important extent toward 
the concentration of the transactions on the money 
market. In spite of the great wealth of provincial Eng- 
land, for more than a century no place except London has 
been able to produce a money market, and the ruling 
position of the capital in the matter of short date credit 
transactions has contributed greatly to the amalgamation 
of the country banks with London estabHshments and has 
considerably strengthened the tendency to a centralized 
system of deposit banking, which is an essential feature of 
EngHsh economic organization. The desire to secure the 

^The English Banking System, National Monetary Commission, 6i 
Cong., 2dsess., Washington, 1910. 



269 



National Monetary Commission 

greatest possible fluidity of capital has led the Bank of 
England to favor loans on stock securities and the dis- 
count of short date bills, and thus to limit its loan trans- 
actions with regard to speculation in stocks and to genuine 
trading credit. This procedure arises, however, merely 
from the general business poHcy of the Enghsh bank of 
issue and is not directly connected with the management 
of the public money; the concentration of money at the 
bank would not necessarily postulate any local concentra- 
tion of its capital. 

According to Bargehot's opinion the English chancellor 
of the exchequer ''created" the money market by his 
deposits ; the management of public money was bound up 
with the banking system before check transactions super- 
seded note payments. On the Continent the order of 
development was reversed; here the gradual transfer of 
the management of the money of private individuals to 
the banks created the money market and developed it to 
a point at which the complete transference of the Govern- 
ment operations is demanded, not only in order to save 
cash payrrients, but also to promote the sectirity of the 
money market. 



270 



APPENDIX I. 



Thk Statutory BasIvS of the: Position of the: Bank of Eng- 
land IN THK English Economic Systkm. 

(i) the: act HvSTablishing the: bank. 

[s and 6 Will, and Mary, c. 20.] 

"An act for granting to their Majesties several Rates and 
Duties upon Tonnage on ships and vessels and upon beere ale and 
other liquors for securing certain recompences and advantages 
in the said act mentioned to such persons as shall voluntarily 
advance the sum of fifteen thousand pounds towards carrying 
on the war against f ranee." 

Sections I to XVII inclusive, with the customary prolixity of 
old English statutes, contain provisions relating to the duties 
imposed; their amount, methods of collection, duration, etc. 
Sections XXXIII to XLVII (the last) provide for the applica- 
tion of the money paid in to the purposes set forth in the act, 
contain general administrative enactmients with regard to cer- 
tain branches of the revenue and finally make provision for the 
raising of a life annuity in case the form of loan which is described 
in further detail in Sections XVIII to XXXII should not prove 
successful. The latter sections alone affect the Bank of England, 
and we reproduce them here, with all their wearisome repeti- 
tions, in order to give a cotnplete account of the legal position of 
the Bank at its foundation. 

" s. XIX. And be it further enacted by the authority aforesaid ^ 
That it shall and may be lawfull to and for their Majesties by 
commission under the Create Scale of England to authorize 
and appointe any number of persons to take and receive all such 
voluntarily subscriptions as shall be made on or before the first 
day of August which shall be in the yeare of our Eord One thou- 



271 



National Monetary Commission 

sand six hundred ninety four by any person or persons Natives 
or Foreigners Bodies Politicke or Corporate for and towards 
the raiseing and paying into the Receipte of Exchequer the said 
sume of Twelve hundred thousand pounds and that the yearely 
sume of one hundred thousand pounds parte of the said yearely 
sume of one hundred and forty thousand pounds ariseing by and 
out of the said Duties and Impositions before mentioned shall 
be applied issued and directed and is hereby appropriated to the 
use and advantage of such person and persons Bodies Politicke 
and Corporate as shall make such voluntarily subscriptions and 
payments their Heires Successors or Assignes in the propor- 
tion hereafter mentioned .... 

**XX. And he it further enacted, That it shall and may be 
lawfull to and for their Majesties by Letters Patents under the 
Create Scale of England to limitt directe and appointe how and 
in what manner and proportions and under what rules and direc- 
tions the said sume of Twelve hundred thousand pounds . . . 
and the said yearely sume of one hundred thousand pounds . . . 
and every or any parte or proportion thereof may be assigneable 
or transferable assigned or transferred to such person or persons 
only as shall freely and voluntarily accepte of the same and not 
otherwise and to incorporate all and every such Subscribers 
and Contributors their Heires Successors or Assigns to be one 
Body Corporate and Politick by the name of the Governor and 
Company of the Banke of England and by the same name of the 
Governor and Company of the Banke of England to have per- 
petuall succession and a Common Scale and that they and theire 
Successors by the name aforesaid shall be able and capable in 
Lawe to have purchase receive possesse enjoye and retaine to 
them and their Successors Lands Rents Tenements and Heredi- 
taments of what kind nature or quality soever. And alsoe to 
sell grant demise alien or dispose of the same. And by the same 
name to sue and implead and be sued and implead answere and 
be answered in Courts of Record or any other place whatso- 
ever and to doe and execute all and singular other matters and 
things by the name aforesaid, that to them shall or may 
appertain to do, subjecte neverthelesse to the proviso and 
condition of Redemption herein after mentioned. 



272 



The English Banking System 

"XXI. Provided alwaies and it is hereby enacted, That in 
case the whole sume of Twelve hundred thousand pounds . . . 
shall not be advanced and paid into the Receipte of Exchequer 
before the First day of January which shall be in the yeare of 
our Lord One thousand six hundred and ninety four that then 
the Subscribers and Contributors shall only have and receive 
so much and such parte and proportion to the said sume or 
sumes soe respectively paid and advanced as shall be after the 
rate of eight pounds per Centum per Annum. And that at 
any Time upon twelve months notice after the first day of 
August which shall be in the yeare of our Lord One thousand 
seven hundred and five upon repayment by Parliament of the 
said Sume of twelve hundred thousand pounds ... or such 
parte thereof as shall be paid or advanced as aforesaid under 
the respective Subscribers and Contributors . . . and of all 
the arrears of the said yearely payments of One hundred thou- 
sand pounds ... or such proportionable parte thereof 
according to the sume, which shall be paid and advanced as 
aforesaid then and from thenceforward the said yearely pay- 
ments and every of them . . . and the said Corporation 
shall absolutely cease and determine any thing herein contained 
in any wise to the contrary notwithstanding." 

XXII provides that the Treasury shall regulate the payment 
of the yearly income without further royal warrant and that 
the officers of the Exchequer shall issue it without fees. 

"XXIII. Provided alwaies and be it further enacted by the 
authority aforesaid, That noe person or persons Boddyes Poli- 
ticke or Corporate shall by themselves or any other person or 
persons in trust for him or them subscribe or cause to be sub- 
scribed for and towards the raiseing and paying the said sume of 
twelve hundred thousand pounds any sume or sumes of money 
exceeding the sume of twenty thousand pounds and that every 
such Subscribers shall at the time of such subscription pay or 
cause to be paid unto the Commissioners who shall be author- 
ized and appointed for takeing and receiving subscriptions as 
aforesaid one full fourth parte of his or their respective sub- 
scriptions and in defaulte of such payments as aforesaid every 
such subscription shall be utterly void and null. And that the 
residue of the said subscriptions shall be paid into the Receipte 

68299° — II iS 273 



National Monetary Commission 

of theire Majesties Exchequer as theire Majesties shall directe 
before the said first day of January next. And in defaulte of 
such payments that then the forth parte first paid as aforesaid 
shall be forfeited to and for the benefit of theire Majesties theire 
Heires and Successors. 

"XXIV. Provided alsoe and he it enacted. That it shall not be 
lawfull to or for any person or persons, Natives and Foreigners, 
Bodyes Corporate or Politicke at any time or times before the 
first day of July next ensueing to subscribe in his her or theire 
owne name or names or in any other name or names in trust for 
him her or them for or towards the raiseing and paying into the 
Receipte of the Exchequer the said sume of Twelve hundred 
thousand pounds . . . any sume or sumes exceeding in the 
whole the sume of Tenne thousand pounds; anything in this 
Act conteined to the contrary in any wise notwithstanding. 

"XXV. Provided alwaies and he it declared and enacted to he 
the true intent and meaneing of this Act, That in case the whole 
sume of Twelve hundred thousand pounds or a moiety thereof 
be not subscribed on or before the First day of August One 
thousand six hundred ninety four as aforesaid, that then the 
powers and authorities in this Act for erecting a Corporation as 
aforesaid shall cease and determine anything herein conteined 
to the contrary notwithstanding. And in such case soe much 
of the said yearely sume of One hundred thousand pounds as 
shall belong to the said Subscribers according to the meaneing of 
this Act shall be transferrable and may be from time to time 
transferred by the respective persons, soe subscribing, advanc- 
ing, and paying any parte of the said Twelve hundred thousand 
pounds into the Exchequer or their respective Heires, Succes- 
sors or Assignes to any person or persons whatsoever by any 
writeing or writeings under the hand and scale of the person or 
persons transferring the same attested by two or more credible 
Witnesses and entered within Twenty dayes after the sealeing 
thereof in a Booke or Bookes to be for that purpose kept in the 
said Exchequer by theire Majesties Remembrancer for the time 
being (for the entering whereof nothing shall be paid) which 
entries the said Remembrancer is from time to time upon 
request directed to make; and such parte of the said yearely 
sume of One hundred thousand pounds as shall by this Act be 

274 



The English Banking System 

due to the said subscribers, shall not att any time or times 
hereafter be made use of or be a fund or security for or lyable 
or applyed to raise pay or secure any more further or other 
sume or sumes of money whatsoever save only such money as 
shall in pursuance of and according to the intent of this Act be 
advanced and paid into their Majesties Exchequer within the 
time by this Act limited for the same. 

"XXVI. And it is hereby enacted by the authority afore- 
said, That the said Corporation so to be made shall not 
borrow or give security by Bill, Bond, Covenant or Agreement 
under their Common Scale for any more further or other sum 
or sumes of money exceeding in the whole the sume of Twelve 
hundred thousand pounds, so that they shall not owe at any 
one time more then the said sume unless it be by Act of Parlia- 
ment upon funds agreed in Parliament, and in such case only 
such further sumes as shall be soe directed and allowed to be 
borrowed by Parliament and for such time only until they shall 
be repaid such further sumes as they shall borrowe by such 
authority and if any more or further or other sumes of money 
shall be borrowed taken up lent or advanced under theire 
Common Scale or for payment of which any Bond Bill, Cove- 
nant or Agreement or other Writeing shall be made sealed or 
given under the Common Scale of the said Corporation soe to be 
made then and in such case all and every person or persons who 
shall be a member or members of the said Corporation, his and 
theire respective private and personall capacities be chargeable 
with and lyable in proportion to theire severall Shares and 
Subscriptions to the repayment of such moneys, which shall be 
soe borrowed taken up or lent with Interest for the same in such 
manner as if such Security had been a Security for payment of 
soe much money and Interest for the same sealed by such 
respective member or members of the said Corporation and deliv- 
ered by him or them as theire respective Acts and Deedes in 
proportion to theire severall Shares or Subscriptions as afore- 
said and that in every such case an Action of Debt shall and 
may be brought commenced prosecuted and mainetained in 
any of their Majesties Courts of Record att Westminster by the 
respective Creditor or Creditors, to whom any such security 



275 



National Monetary Commission 

under the Common Seale of the said Corporation shall be made 
or his or theire respective Executors or Administrators in pro- 
portion to theire respective Shares or Subscriptions as afore- 
said and therein recover and have judgement for him or them 
in such and the like manner as if such security were respectively 
sealed by the respective person or persons, who shall be soe 
sued or his or theire respective Ancestor or Testator or Intes- 
tate and by his and them executed and delivered as his or theire 
respective Acts and Deedes any condition covenant or agree- 
ment to be made to the contrary thereof in any wise notwith- 
standing. And if any condition covenant or agreement shall 
be made to the contrary, the same shall be and is hereby de- 
clared to be void any thing herein contained or any Lawe or 
Usage to the contrary notwithstanding and in such Action or 
Actions soe to be brought noe Privilege Protection Kssoign or 
Wager of Lawe nor any more then one Imparlance shall be 
allowed. 

"XXVII. And to the intent that theire Majesties Subjects 
may not be oppressed by the said Corporation by theire monopo- 
lising or ingrosseing any sort of Goods, Wares or Merchan- 
dizes, Be it further declared and Enacted by the authority 
aforesaid, that the said Corporation to be made and created by 
this Act, shall not att any time dureing the continuance thereof 
deale or trade or permitt or suffer any person or persons what- 
soever either in trust or for the benefitt of the same to deale or 
trade with any of the Stock moneyes or Effects of or in any wise 
belonging to the said Corporation in the buying or selling of 
any Goods, Wares or Merchandizes whatsoever and every 
person or persons who shall soe deale or trade or by whose 
orders or directions such Dealeings or Tradeing shall be made 
prosecuted or managed, shall forfeite for every such Dealeing 
or Tradeing and every such order and directions treble the 
valy of the Goods and Merchandize soe traded for to such 
person or persons who shall sue for the same by Action of Debt, 
Bill, Plaint or information in any of theire Majesties Courts of 
Record at Westminster wherein noe Essoigne, Protection nor 
other Privilege whatsoever nor any Injunction Order of restrainte 
nor Wager of Lawe shall be allowed nor any more than one 
Imparlance. 

276 



The English Banking System 

"XXVIII. Provided that nothing therein contained shall 
any wayes be construed to hinder the said corporation from 
dealing in bills of Exchange or in buying or Selling Bullion, 
Gold and Silver or in selling any goods, wares or merchandize 
whatsoever, which shall really and bona fide be left or deposited 
with the said corporation for money lent and advanced thereon 
and which shall not be redeemed at the time agreed on or 
within three months after or from selling such goods as shall or 
may be the produce of lands purchased by the said Corporation, 

"XXVIX. Provided alwayes and he it enacted by the authority 
aforesaid, That all and every Bill or Bills obligatory and of creditt 
under the Scale of the said Corporation made or given to any 
person or persons shall and may by Indorsement thereon under 
the hand of such person or persons be assigneable and assigned 
to any person or persons who shall voluntarily accepte the same 
and soe by such Assignee toties quoties by indorsement there- 
upon and that such Assignment and Assignements soe to be 
made, shall absolutely vest and transferre the Right and Prop- 
erty in and unto such Bill or Bills Obligatory and of Creditt and 
the moneys due upon the same and that the Assignee or Assignees 
shall and may sue for and maintaine an action thereupon in his 
owne name. 

*'XXX. Provided alwaies and it is hereby further enacted, That 
if the Governor, Deputy Governor, the Director, Managers, Assist- 
ants or other Members of the said Corporation so to be estab- 
lished shall upon the account of the said Corporation at any time 
or times purchase any lands or revenues belonging to the Crowne 
or advance or lend to their Majesties, theire Heires or Successors 
any sume or sumes of money by way of Loan or Anticipation on 
any parte or parts, branch or branches, fond or fonds of the 
Revenues now granted or belonging or hereafter to be granted 
or belonging to their Majesties, their Heires or Successors other 
than such fond or fonds, branch or branches of the said Revenues 
only on which a credit of loan is or shall be granted by Parlia- 
ment that than the said Governor, Deputy Governor, Directors, 
Managers, Assistants or other Members of the said Corporation 
who shall consent agree to or approve of the advanceing or lend- 
ing to theire Majesties, theire Heires or Successors such sume or 



277 



National Monetary Commission 

sumes of money as aforesaid such and each and every of them 
soe agreeing consenting approving and being thereof lawfully 
convicted, shall for every such offence forfeite treble the value 
of every such sume or sumes of money soe lent whereof one fifth 
parte shall be to the informer to be recovered in any of their 
Majesties Courts of Record at Westminster by action of Debt 
Bill Plainte or Information wherein no Protection Wager of 
Lawe, Essoign, Privilege of Parliament or other Privilege shall 
be allowed, nor any more than one Imparlance and the residue 
to be disposed of towards publicke uses as shall be directed by 
Parliament and not otherwise. 

"XXXI. Provided alwaies and he it enacted, That all Amercia- 
ments, Fynes and Issues against the said Corporation and theire 
Successors had charged or estreated in or upon account of any 
suites or actions to be prosecuted or brought against them shall 
not be pardoned acquitted or discharged by any Letters of 
Signet, Privy Scale or Greate Scale of theire Majesties, theire 
Heires or Successors or otherwise howsoever and in case any such 
Amerciaments Fynes or Issues shall be estreated into their 
Majesties Exchequer against the said Corporation upon any 
Processe for non-appeareance att the suite of any person or 
persons that then it shall and may be lawfull to and for the Offi- 
cers of their Majesties Exchequer for the time being who are 
hereby directed to pay the said yearely sume of One hundred 
thousand pounds to the said Corporation to detaine soe much 
money as the said Amerciaments, Fynes or Issues shall amount 
unto out of the said yearly sume of One hundred thousand pounds 
payable to the said Corporation. 

"XXXII. And he it further enacted, That if att any time 
hereafter any person or persons shall obtaine any Judgment or 
Judgments in any Court of Lawe against the said Corporation for 
any Debte or sume of money and shall bring execution or execu- 
tions thereupon unto the said Officers of theire Majesties Exche- 
quer, that then it shall and may be lawful to and for the said Of- 
ficers of the said Exchequer, to pay and they are hereby required 
to pay the said sume or sumes of money in the said executions 
mentioned to the Plaintiffe or Plainetiffes therein named or theire 
Assignes whose Receipte shall be a sufficient discharge for the 



278 



The English Banking System 

same and that the said Officers of the Exchequer shall and may 
detain soe much of the said yearely sume of One hundred thou- 
sand pounds as the said Debt or Debts shall amount unto. 

''XXXIII. . . . and whereas some Doubts may arise 
whether any Member or Members of Parliament may be con- 
cerned in the Corporation to be erected in pursuance of this Act 
be it therefore declared and enacted by the authority aforesaid, 
that it shall and may be lawfull to and for any Member or Mem- 
bers of the House of Commons to be a Member or Members of 
the said Corporation for the purposes in this Act mentioned any- 
thing in the recited Act conteined to the contrary in any wise 
notwithstanding. ' ' 

(2) THE) I,ATBR ACTS. 

Among the statutory enactments subsequent to 5 and 6 
Will, and Mary, c. 20, it is only necessary to call attention to 
those which limited, improved, or in any way altered, the legal 
position of the Bank. Loan acts pure and simple and the 
merely formal acts which prolonged the Bank charter, and 
which were moreover generally combined with arrangements 
for loans, need not be referred to here. Among the former 
we need only notice those provisions which relate to the exclu- 
sive privileges of the Bank. Thus it is stated in 8 and 9 Will. 
Ill, c. 20, s. XXIX, 1697: 

'' Andhe it further enacted, That during the continuance of the 
Corporation of the governor & company of the bank of England 
no other Bank or any other corporation, society, fellowship, 
company or constitution, in the nature of a bank shall be erected 
or established, permitted, suffered, countenanced, or allowed by 
act of parliament within this kingdom." 

This provision was further extended in 7 Anne, c. 7 (1708). 

"That during the continuance of the said corporation of the 
governor and company of the bank of England, it shall not be 
lawfull for any body politic or corporate whatsoever, erected or 
to be erected (other than the said governor and company of the 
bank of England) or for any other persons whatsoever united 
or to be united in covenants or partnership, exceeding the num- 
ber of six persons, in that part of Great Britain called England to 
borrow, owe or take up any sum or sums of money on their bills 

279 



National Monetary Commission 

or notes payable at demand, or at any less time than six months 
from the borrowing thereof." 

And was again expressly repeated in 15 Geo. II, c. 13, s. 5, 1742 : 
"And to prevent any doubts, that may arise concerning the 
privilege or power given by former acts of Parliament to the said 
governor and company of exclusive banking, and also in regard 
to the erecting of any other bank or banks by parliament or re- 
straining other persons from banking, during the continuance of 
the said privilege granted to the governor and company of the 
bank of England as before recited; it is hereby further enacted 
and declared by the authority aforesaid, That it is the true 
intent and meaning of this act, that no other bank shall be 
erected, established or allowed by Parliament and that it shall 
not be lawful for any body politik or corporate whatsoever, 
erected or to be erected, or for any other persons whatsoever, 
united or to be united in covenants or partnership, exceeding the 
number of six persons, in that part of Great Britain called 
England, to borrow, owe or take up any sum or sums of money 
on their bills or notes payable at demand, or at any less time 
than six months from the borrowing thereof, during the contin- 
uance of such said privilege to the said governor and company, 
who are hereby declared to be and remain a corporation with the 
privilege of exclusive banking as before recited. ..." 



280 



Appendix II. 

THE SETTLEMENT OF THE NATIONAL LAND BANK. 

The settlement of the National Land Bank was drawn up on 
August lo, 1695, by the "trustees and managers" of the bank, 
elected by the subscribers of the land bank loan. The draft 
was made by two of them, Nicholas Barbon and John Asgill, 
and, by way of acknowledgment, £2,000 in bank stock was 
voted to the former and £3,000 to the latter. The statute is 
printed in Lord Somers's "Tracts," Vol. XI, as "The Settle- 
ment of the Land Bank," and its principal contents are as 
follows : 

It was proposed to raise the credit of owners of land "by 
conveying the legal estates thereof unto trustees, and preserving 
and continuing the same in them; and dividing the values 
thereof into greater or lesser sums and making such values 
assignable and reassignable in register books * * * and 
giving power unto such trustees to issue out bills of charge on 
security of the said values." 

The value of the lands conveyed to the trustees was to be 
divided into four parts. Three of these were called "The 
values of the register" and the fourth part "The equities of 
redemption." The values of the register were to be divided 
into sums of thousands, hundreds, fifties, etc., and each £100 
of this value of the register was to be "esteemed and taken as a 
security for one hundred pounds principal money, and interest 
secured on the lands to which such values shall relate by books 
and numbers." 

"When such conveyance shall be executed the auditor, for 
the time being (by warrant of the trustees and manager for the 
time being, in writing, and not otherwise), shall adjust the 
whole value of the lands so conveyed at such values thereof as 
shall be expressed in the said warrant, and shall sign such valu- 
ation in the margin of the said conveyance, and of the counter- 

281 



National Monetary Commission 

part thereof * * * which valuation shall be called 'the 
value of the auditor.' " The register was then to reduce this 
valuation to three-quarters. This reduced value was to be 
called "the value of the register," and was intended as " a limita- 
tion to the trustees and managers for the time being, to restrain 
them from lending monies, or issuing out bills of exchange on 
security of the said lands for any greater sum of money than 
such reduced values of the register" — i. e., than three quarters 
of the estimated value of the property. 

The names of the owners of the properties, together with a 
statement of the value of the auditor, were then to be entered 
in a book in alphabetical order. The credit allowed by the 
Bank was then to be entered in a separate book called "the 
value ledger," in which a debit and credit account was to be 
opened for each owner and on the credit side an entry was to 

be made in the following form: "Cr. A. B. for pounds 

value of the register, secured on the lands rents and estates 
entered in libro A. No. — ." 

The values of the register only amounted to three-quarters of 
the value of the auditor, and the remaining quarter formed the 
equity of redemption, so that the owner was credited with the 
latter in another book, the "purchase ledger," in the following 
form: "A. B. creditor for the equity of redemption of the 
lands rents and estates entered in libro A. No. — ." 
Besides this there was yet another book, the "voucher book," 
for "transferring the credit of the said values and the right and 
title thereof." This formed an annex to the value ledger, and 
served especially for the registration of the documents by 
reason of which the value of the register with which the land- 
owner was credited was gradually transferred into the hands of 
the Bank. Thus whenever a landowner took advantage of his 
credit to borrow a sum of money from the bank, he had to sign 
a warrant from the trustees to the register authorizing the 
latter to transfer to the Bank a portion of the value of the register 
equal to the sum borrowed. On repayment of the loan an 
equivalent amount was to be transferred back again. 

The trustees and managers for their part had the right to 
borrow money on the security of the values of the register, but 
to amounts not exceeding the value of the advances made by 

282 



The English Banking System 

them. This borrowing was to be managed by the issue of 
bills in the following form : 

* ' This bill, pursuant to the settlement of the Land Bank enrolled 
in Chancery anno dom. 1695, doth charge one hundred pounds 
value of the register secured upon the lands rents or estates 
entered in libro No. — and the stock of monies and funds of 
insurance annexed to the said Bank with payment of one 
hundred pounds and interest to A. B. By order of the 
trustees and managers of the Land Bank, established Anno 
Dom. 1695." 

The bills were to be secured upon a definite estate only by 
book and number; but this reference was to be as effective as 
if the lands referred to were expressly named and described in 
the bill. 

The equities of redemption were at the free disposal of the 
owner even should the values of the register be completely 
charged, but they were liable in the first instance for the credit 
which the owners might have received on these values of the 
register. 

The trustees and managers could recall the loans at a year's 
notice. They must accept repayments at any time but for 
amounts not less than £100. The bills issued bore interest, the 
first payment of which fell due six months after issue. If pay- 
ment was not demanded within thirty days after it was due, the 
bills ceased to bear interest until the day on which they were 
again presented. Should a property lose in value, the bills secured 
on it were to be redeemed. For this purpose the trustees and 
managers were to issue monthly announcements in which all 
pay offices were ordered to retain and pay off the bills (as 
described in detail). In this way also outstanding interest and 
capital were to be claimed. So long as the interest was paid 
regularly no debtor might be disturbed in his possession of the 
land. It was especially stated that each estate was chargeable 
only with the value secured on itself. 

For the security of the bills issued the trustees and managers 
were to "lay out and employ ten shillings per annum, out of the 
interest of every one hundred pounds by them lent * ^ * 
to be a fund of insurance." This fund was in particular to be 



283 



National Monetary Commission 

charged with such bills as, having been for any cause whatever 
called in, had yet not been presented for payment. The notices 
calling in bills w^ere to be published monthly for six months. 
Should the bill not be presented within six months after the last 
notice, the lands on which the bill w^as charged were to be freed 
and the bills were thenceforth to be charged on the funds of 
insurance. If the debtors of the Bank failed to pay interest or 
capital when due the trustees and managers might use the ordi- 
nary legal means to recover the debt. 

The administration of the loans was organized as follows : 

The trustees and managers, 2 1 in number, were to be selected 
each year on November 21. The election was to be by a major- 
ity of votes and each person who had £ i ,000 or more in the 
stock was to have 5 votes and no more; £500 to £1,000 
entitled the holder to 3 votes, £300 to £500 to 2 votes, and £100 
to £300 to I vote. 

Anyone might be elected who had at least £1,000 in the 
stock. If the share of one of those elected should fall below 
£1,000 his office ceased ipso facto. Not more than 15 out of the 
trustees for the previous year might be re-elected. 

The trustees were to make decisions by a majority of votes. 
They might, however, elect a committee to manage the current 
administration. The appointment of all the officers of the 
Bank was in their hands. No one might be auditor or register 
who did not hold at least £1,000 in stock. The income of the 
trustees and the yearly dividend were to be settled by the 
general assembly of the shareholders. 



284 



Appendix III. 

THE PRESENT FORMS OF THE EXCHEQUER BII.LS, TREASURY 
BILLS, AND EXCHEQUER BONDS.** 

Exchequer bill. 

[Stamp]: By virtue of an [Stamp]: By virtue of an 
act 29 Vict. c. 25 I £1,000. act 29 Vict. c. 25 i 
Dated the — day of Dated the — day of 

This Exchequer Bill entitles^ or Order to claim payment 

of One Thousand pounds at the Bank of England out of the Con- 
solidated Fund, at the expiration of any period of Twelve months, 
not later than five years from the date hereof. 

Interest on this Bill will be paid half-yearly at the Bank of 
England, at such rate per centum per annum as shall be notified 
from time to time in the *' London Gazette " by the Commissioners 
of Her IMajesty's Treasury. 

This Bill may be paid for the sum of One Thousand pounds, 
and interest accrued thereon, to the Receivers and Collectors in 
the United Kingdom, of any of the Public Revenues, Aids, Taxes, 
or Supplies, or to the account of Her Majesty's Exchequer at the 
Bank of England, at any time in the last six months of every 
year, commencing from the day of the date hereof, in which it 
shall have currency by law. 

Signed in the presence of — 



Exchequer bill interest certificate. 
No. I. £1,000. 10. 

[Act 29 Vict. cap. 25.] 

This Coupon entitles the Bearer to Interest on the above sum 
for half year to 



Comptroller and Auditor General. 



(^ According to the treasury minutes of March 9 (exchequer bills and 
bonds) and of March 16, 1867 (treasury bills). 

& If the Blank is not filled up, this Bill will be paid to bearer. 



285 



National Monetary Commission 

[On the back of the bill.] 

The holder of this bill, when intending to claim payment of 
the principal money at the expiration of any year, must give 
three days' previous notice and deposit the Bill (together with 
the Interest Coupons not due) at the Bank of England for 
verification. 



{Exchequer bond.) 
£ioo. 

[Stamp]: A i,ooo. Principal to be paid of at par i8 — . Per act — 

Vict. Reg. cap, — Interest at the rate of — per cent per ann. Dated 
at the on the i8 — , 

Exchequer bond. 

This Bond entitles the Bearer to One Hundred Pounds, with 
the Interest due and payable thereon half-yearly, and the 
Principal Sum secured by this Bond, to be repaid out of such 
Moneys as shall be provided by ParHament in that behalf. 

The several Sums in respect of Interest mentioned in the 
annexed Certificates are transferable by delivery of such respec- 
tive Certificates, and will be payable to the persons producing 
and delivering the same at the Bank of England. 

{To he signed by the Comptroller and Auditor General.) 

[EXCHEQUER SEAL.] 

Signed in the presence of — 



N. B. The Cheques must not be cut off. 



Interest certificate. 
No. 1 ,000 A. £ 

Interest certificate on exchequer bond per act — Vict. cap. — for £100. 
This Certificate entitles the Bearer to pound 



shillings, Interest at £ — per cent per ann., payable at the Bank 
of England, for half a year ending 1 8 — . 



Comptroller and Auditor General. 
286 



The English Banking System 

Treasury hill. 

A. 0000. 1. Due June 28, 1877. A. 0000. i 

£ By virtue of an Act 40 Vict. c. 2. £ 

London, March 28, i8jj. 

This Treasury Bill entitles ^ or order to payment 

of pounds at the Bank of England out of the Consolidated 

Fund on the 28th June, 1877. 

(Signed) 

Comptroller and Auditor General. 
In presence of — 



0- If this blank be not filled up, the Bill will be paid to bearer. 



287 



Appejndix IV. 

AVKRAGK AMOUNT OF THE PUBLIC DEPOSITS AT THE BANK OF 

ENGI.AND. 

The report of the committee on renewing the bank charter, 
1 83 1, gives the average amounts of the pubHc deposits at the 
Bank of England for the years 1807 to 1831, as follows: 

[000 omitted.] 



Year. 



1807 

1808 

1809 

1810 

1811 

1812 

1813 

1814 

1815 

1816 

1817 

1818 

1819 

Total 



Amount. 



£12, 647 

II, 761 

11.093 

11.950 

10, 191 

10, 390 

10,393 

12, 158 

II, 737 

10, 807 

8,699 

7, 066 

4. 538 



133.430 



Year. 



1820 

1821 

1822 , 

1823 

1824 , 

1825 

1826 

1827 

1828 

1829 

1830 

1831 

Total 



Amount. 



£3, 713 
3.920 
4. 107 
S.S26 
7, 222 
5.347 
4. 214 
4. 223 
3.821 
3.862 
4,761 
3.948 



54.664 



Average from 1807 to 1831, £7,523. 

The following table refers to the last nineteen years. The 
estimates for the years 1869 to 1879 are taken from the Econo- 
mist, December 13, 1879, No. 1894. The averages for the 
remaining years are based on the weekly returns of the Bank 
for that period, which returns are given in the corresponding 
numbers of the Economist: 



288 



The English Banking System 



[ooo omitted.] 



Year 



1864 

186s 

1866 

1867 

1868 

1869 

1870 

1871 

1872 

Total 



Amount. 



Year. 



£6. 789 
6.556 
5. 290 
6,423 
4.856 
5. 129 
7,635 
7.071 
8,875 



58,624 



1873 

1874 

187s 

1876 

1877 

1878 

1879 

1880 

1881 

1882 

Total 



Amount. 



£9, 42a 
6,251 
5.223 
6, 793 
5.838 
5.560 
5.867 
6.851 
6.535 
5.479 



63.819 



Average from 1864 to 1882, £6,444. 

Since 1882 the development has been as follows: 

[000 omitted.] 



Year. 



1883 

1884 

188s 

1886 

1887 

1888 

1889 

1890 

1891 

1892 

1893 

1894 

1895 

1896 

Total, 1883-1896 



Amount. 



£6,924 
7, 288 

6, 196 
4.983 
5.377 
6,443 

7. 179 
5,840 
6, 610 
5,856 

5.697 

6, 969 

7. 601 
10, 418 



93, 381 



Year. 



1897 

1898 .". 

1899 

1900 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

1910 

Total, 1897-1900 



Amount. 



£9.983 

10, 501 

10, 042 

9.28s 

9.735 

II, 069 

8.834 

8,454 

11.837 

10,387 

9. 189 

9. 225 

10, 519 

13.078 



142, 134 



Average from 1883 to 1910 £8.412. 



68299° — 3^1" 



-19 



289 



Appendix V. 

BANK ACT, 1892. 

[55 & 56 Vict. Ch. 48.) 

CONTENTS. 

Sec. I. Remuneration to Bank of England for management of unre- 
deemed debt inscribed in books. 

Sec. 2. Remuneration to Bank of Ireland for management of unre- 
deemed debt inscribed in books. 

Sec. 3. Remuneration to Bank of England for management of Exchequer 
bonds and bills and Treasury bills. 

Sec. 4. General provision as to payments for management of unre- 
deemed debt and of Exchequer bonds and bills and Treasury bills. 

Sec. 5. Rate of interest on Government debt to the Banks of England 
and Ireland. 

Sec. 6. Mode of dealing with dead Bank of England notes. 

Sec. 7. Internal regulations and stock of Bank of England. 

Sec. 8. Short title, commencement, and repeal. 

Schedule of Acts repealed (presenting a convenient index to the Acts 
regulating the relations of the Bank to the State). 



CHAPTER 48. — An Act For making further Provision respecting certain 
Payments to the Banks of England and Ireland, and for other purposes 
connected with those Banks. [2 7tli June 1892.] 

BE it enacted by the Queen's most Excellent Majesty, by 
and with the advice and consent of the Lords Spiritual and 
Temporal, and Commons, in this present Parliament assembled, 
and by the authority of the same, as follows: 

I. There shall be paid to the Bank of England, during the 
period in this Act mentioned, as remuneration for the manage- 
ment of the National Debt inscribed in their books an annual 
sum calculated at the rate of three hundred and twenty-five 
pounds for every million pounds of such debt up to five hundred 
million pounds, and at the rate of one hundred pounds for every 
million pounds of such debt above the said five hundred million 
pounds: Provided that during the said period the said annual 



290 



The English Banking Syste 



m 



sum shall not be less than one hundred and sixty thousand 
pounds. 

2. There shall be paid to the Bank of Ireland, during the 
period in this Act mentioned, as remuneration for the manage- 
ment of the National Debt inscribed in their books an annual 
sum calculated at the rate of four hundred and twenty-five 
pounds for every million pounds, if such debt does not exceed 
thirty million pounds, and if it does exceed that sum, then at the 
rate of three hundred pounds for every million pounds of such 
debt : Provided that during the said period the said annual sum 
shall not be less than eight thousand pounds. 

3. There shall be paid to the Bank of England, during the 
period in this Act mentioned, for the management in every 
financial year, of Exchequer bonds. Exchequer bills, and Treas- 
ury bills, an annual sum calculated at the rate, as respects 
Exchequer bonds and Exchequer bills, of one hundred pounds, 
and, as respects Treasury bills, of two hundred pounds, for 
every million pounds of bonds or bills outstanding on the last 
day of the previous financial year. 

4. — (i.) The annual sums fixed by this Act for the manage- 
ment of the National Debt inscribed in the books of the Bank 
of England or Ireland and of Exchequer bonds. Exchequer bills, 
and Treasury bills shall be payable in respect of that manage- 
ment for every financial year up to and including the year ending 
the thirty-first day of March, one thousand nine hundred and 
twelve, and thereafter from year to year until Parliament other- 
wise directs. 

(2.) The annual sums for the said management in any financial 
year shall be paid before the fifth day of July in the following 
financial year. 

(3.) The National Debt Commissioners shall certify the amount 
of the unredeemed National Debt which on the last day of every 
financial year is inscribed in the books of the Bank of England 
and Bank of Ireland, respectively, and the annual sums or the 
management of the Debt in the following financial year shall be 
calculated on the amount so certified. 

(4.) Such certificate shall state the nominal capital amount of 
all the unredeemed National Debt so inscribed, and shall state the 



National Monetary Commission 

capital amount of every terminable annuity at fifteen years pur- 
chase thereof if originally created for a term exceeding fifty years, 
and at ten years purchase thereof if originally created for a term 
of fifty years or under. 

(5,) The said annual sums shall continue to be payable out of 
the permanent annual charge for the National Debt. 

(6.) For the purpose of calculating the said annual sums, the 
National Debt shall include the Local Loans stock and Guaran- 
teed Land stock, but such proportion of those sums as is payable 
in respect of the management of the two last-mentioned stocks 
shall be paid to the Bank in the case of the Local Loans stock out 
of the Local Loans fund, and in the case of Guaranteed Land 
stock out of money provided by Parliament for the service of the 
Irish Land Commission. 

5. Whereas the Bank of England and the Bank of Ireland 
respectively have consented to the annuity or interest on the debt 
to them from the public being reduced to the rate of two and 
three-quarters per cent per annum until the fifth day of April one 
thousand nine hundred and three; Be it therefore enacted as 
follows : 

(i.) The annuity or interest payable as part of the permanent 
annual charge for the National Debt — 

(a) in respect of the debt due from the public to the Bank of 
England, (which at the passing of this Act amounts to eleven 
million fifteen thousand and one hundred pounds) ; and 

(h) in respect of the debt due from the public to the Bank of 
Ireland, (which at the passing of this Act amounts to two million 
six hundred and thirty thousand seven hundred and sixty-nine 
pounds four shillings and eightpence), shall be at the rate of 
two pounds fifteen shillings per cent per annum, until the fifth 
day of April, one thousand nine hundred and three, and after 
that day, at the rate of two pounds ten shillings per cent per 
annum: Provided that if the Bank concerned by notice in 
writing to the Treasury six months before the said day decline 
to accept such lower rate of interest, the debt to that Bank may 
be paid off without further notice, and until payment, the said 
annuity or interest shall continue to be payable at the rate of 
two pounds fifteen shillings per cent per annum. 



2g2 



The English Banking System 

(2.) The said annuity or interest shall be paid by equal quar- 
terly payments on the fifth day of January, the fifth day of 
April, the fifth day of July, and the fifth day of October in each 
year. 

6. — (i.) Where Bank of England notes issued more than forty 
years have not been presented for payment, the Bank of England 
may write off the amount, or any proportion of the amount of 
the said notes from the total amount of notes issued from the 
issue department, and the Bank Charter Act 1844 shall apply 
as if the amount of notes so written off had not been issued; 
Provided that — 

(a) a return of the amount of notes so written off shall be 
forthwith sent to the Treasury and laid by them before Parlia- 
ment; and 

(6) this section shall not affect the liability of the Bank to 
pay any note included in the amount so written off, and if it is 
presented for payment the amount shall either be paid out of 
the bank notes, gold coin, or bullion, in the banking department, 
or, if it is exchanged for gold coin or bullion in the issue depart- 
ment, or for a note issued from the issue department, a corre- 
sponding amount of gold coin or bullion shall be transferred from 
the banking department and appropriated to the issue depart- 
ment. 

(2.) This section shall be construed as one with the Bank 
Charter Act, 1844. 

7. — (i .) It shall be lawful for Her Majesty the Queen to grant, 
and for the Bank of England to accept, a supplemental charter 
regulating the internal affairs of the corporation of the Bank 
of England, and if such charter is granted the Acts specified in 
Part III. of the schedule to this Act shall be repealed as from 
the date of such supplemental charter to the extent in the third 
column of that schedule mentioned. 

(2.) Notwithstanding the repeal of any enactment by this Act 
the capital stock of the Bank of England as existing at the 
passing of this Act shall be subject to the enactments so far as 
unrepealed which relate to stock of the Bank of England, and 
the holders of the stock shall be members of the corporation of 
the Bank of England. 

8. — (i.) This Act may be cited as the Bank Act, 1892. 

293 



National Monetary Commission 

(2.) This Act shall take effect as from the beginning of the 
current financial year. 

(3.) The Acts set out in Parts I. and II. of the schedule to 
this Act are hereby repealed to the extent in the third column 
of that schedule mentioned. 



Schedule of Enactments Repealed. 

Part I. — Enactments relating to the debt from the public to and 
the stock of the Bank of England. 



Session and chapter. 



5 & 6 Will. & Mar.c. 20. 
8 & 9 Will., 3. c. 20. . 



6 Anne, c. 59. (c. 32. 
in the old editions). 



7 Anne, c. 30. (c. 7. in 
the old editions). 



Title or short title. 



The Bank of England act. 1694 . 
The Bank of England act, 1696 , 



An act for regulating the qualifica- 
tions of the elections of the gov- 
ernor, deputy governor, direc- 
tors, and voters of the Governor 
and Company of the Bank of 
England. 

The Bank of England act, 1 708 . . . 



Extent of repeal. 



Section 2 1 ; section 3 2 ; and 
section 34. 

Section 26, from "or for 
whom such subscrip- 
tions shall be made" 
down to "twentieth day 
of June be and," and 
from "at all times" 
down to "June;" sec- 
tion 32, down to "by 
virtue of the said recited 
act and;" and the words 
"from and after the 
completing the said 
subscriptions;" section 
3,3 down to "ninety- 
seven;" section 37: sec- 
tion 47; section 48. 

The whole act. 



Preamble; sections i to 5, 
section 6 7 down to ' ' per- 
sons, and that" and 
from "and the said 
allowances" down to 
" Governor and com- 
pany," and from "al- 
lowances and" down to 
•'governor and company 
as aforesaid;" section 
68. 



294 



The English Banking System 

Part I. — Enactments relating to the debt from the public to and 
the stock of the Bank of England — Continued. 



Session and chapter. 



3 Geo. I, c. 8 

II Geo. I. c. 9 . . . . 



I Geo. 2. Stat. 2, c. 8 



3 Geo. 2, c. 3. 



IS Geo. 2, c. 13 



19 Geo. 2, c. 6 



23 Geo. 2, c. I 



23 Geo. 2, c. 22 



Title or short title. 



The Bank of England act, 1716, . . . 

An act the title of which begins 
with the words "An act for con- 
tinuing the several annuities," 
and ends with the words "re- 
deemable by Parliament." 

An act for granting an aid to His 
Majesty by sale of annuities to 
the Bank of England at £4 per 
centum redeemable by Parlia- 
ment, and charged upon the 
duties on coals and culm. 

An act for raising the sum of 
£1,250,000 by sale of annuities 
to the Bank of England after 
the rate of £4 per centum per 
annum, redeemable by Parlia- 
ment, and for applying the pro- 
duce of the sinking fimd. 

An act for establishing an agree- 
ment with the Governor and 
Company of the Bank of Eng- 
land for advancing the sum of 
£1,600,000 toward the supply 
for the service of the year 1742. 

An act the title of which begins 
with the words "An act for es- 
tablishing an agreement," and 
ends with the words "one 
thousand seven hundred and 
forty-six." 

An act for reducing the several an- 
nuities which now carry an inter- 
est after the rate of £4 per cen- 
tum per annum to the several 
rates of interest therein men- 
tioned. 

An act for giving further time to 
the proprietors of annuities after 
the rate of £4 per centum per 
annum to subscribe the same in 
the manner and upon the terms 
therein mentioned, and for re- 
deeming such of the said annui- 
ties as shall not be so sub- 
scribed. 



Extent of repeal. 



Section 45. 

Preamble and sections i 
and 5. 



Section 5. 



Do. 



Sections 6 and 7. 



Section 3 ; section 5 ; sec- 
tion 8; sections 13 and 



14. 



The whole act, except sec- 
tion 8. 



The whole act, except sec- 
tions 8 and 14. 



295 



National Monetary C ommis s i o 



n 



Part I. — Enactments relating to the debt from, the public to and 
the stock of the Bank of England — Continued. 



Session and chapter. 


Title or short title. 


Extent of repeal. 


S6 Geo. 3, c. 96 


An act for establishing an agree- 


Section 3, down to "serv- 






ment with the Governor and 


ice as aforesaid," and 






Company of the Bank of Eng- 


from "making an en- 






land, for advancing the sum of 


crease" to the end of the 






£3,000,000 for the service of the 


section; and section 5. 






year 181 6. 




24 & 25 Vict., c. 


3 


An act to make further provision 


The whole act, except sec- 






respecting certain payments to 


tions 4, 5, 9, and 10. 






and from the Bank of England, 








and to increase the facilities for 








the transfer of stocks and annui- 








ties, and for other purposes. 




29 & 30 Vict., c. 


25. • . 


The exchequer bills and bonds act, 

1866. 


Section 29. 


33 & 34 Vict., c. 


71. . . 


The national debt act, 1870 


Sections 40 and 64. 


40 & 41 Vict., c. 


2 . . . . 


The treasury bills act, 1877 


Section 11 and section 12 
from ' ' The allowance ' ' 
to the end of the section. 


50 & 51 Vict., c. 


16.. . 


Xational debt and local loans act, 
1887. 


Section 18. 


51 & 52 Vict., c. 


2 . . . . 


The national debt (conversion) 
act, 1888. 


Section 3 1 . 


52 & 53 Vict., c. 


4. . . . 


The national debt redemption act, 
1889. 


Section 17. 



Part II. — Enactments relating to the debt from the Public to the 

Bank of Ireland. 



28 & 29 Vict., c. 16, 



An act to make further provision 
for the management of the unre- 
deemed public debt in Ireland 
and for the reduction of the in- 
terest payable on certain sums 
advanced by the Bank of Ireland 
for the public service. 



The whole act. 



296 



The English Banking System 

Part III. — Enactments relating to internal affairs of Bank of 

England. 



Session and chapter. 


Title or short title. 


Extent of repeal. 


8 & 9 Will. 3. c. 


20 . . . 


The Bank of England act, 1696 . . . 


Section 34 from "within 
seven days" to the end 
of the section; section 


IS Geo. 2, c. 13 




An act for establishing an agree- 
ment with the Governor and 
Company of the Bank of Eng- 
land for advancing the sum of 
£1,600,000 toward the supply 
for the service of the year 1742. 


52. 
Section 13. 


24 Geo. 2, c. 4 . 




An act for enabling the Bank of 


The whole act, so far as 






England to hold general covirts 


unrepealed. 






and courts of directors in the 








manner therein directed 




7 Geo. 3 , c. 48 . 




An act for regulating the proceed- 


The whole act, so far as it 






ings of certain public companies 


applies to the Bank of 






and corporations carrying on 


England. 






trade or dealings with joint 








stocks in respect to the declaring 








of dividends, and for further 








regulating the qualification of 








members for voting in their re- 








spective general courts. 




35 & 36 Vict., c 


34. . . 


The Bank of England (election of 
directors") act, 1872. 


The whole act. 



297 



xFe '!2 



61ST Congress } 
2d Session ) 



SENATE 



Document 
591 



NATIONAL MONETARY COMMISSION 

HISTORY OF THE BANK 
OF ENGLAND 

And its Financial Services to the State 

Second edition, revised 
BY 

EUGEN VON PHILIPPOVICH 

Professor of Political Economy in the University of Vienna 

Translated by 

CHRISTABEL MEREDITH 

WITH AN INTRODUCTION BY 
H. S. FOXWELL 






Washington : Government Printing Office : 1911 



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